Item 1. Financial Statements (Unaudited)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Horace Mann Educators Corporation:
Results of Review of Interim Financial Information
We have reviewed the consolidated balance sheet of Horace Mann Educators Corporation and subsidiaries (the Company) as of
June 30, 2019
, the related consolidated statements of operations, comprehensive income (loss) and changes in shareholders' equity for the three-month and six-month periods ended
June 30, 2019
and
2018
, and cash flows for the
six
-month periods ended
June 30, 2019
and
2018
, and the related notes (collectively, the consolidated interim financial information). Based on our reviews, we are not aware of any material modifications that should be made to the consolidated interim financial information for it to be in conformity with U.S. generally accepted accounting principles.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in shareholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 1, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This consolidated interim financial information is the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with the standards of the PCAOB. A review of consolidated interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
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|
|
/s/ KPMG LLP
|
KPMG LLP
|
|
|
Chicago, Illinois
|
|
August 8, 2019
|
|
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Investments
|
|
|
|
|
Fixed maturity securities, available for sale, at fair value
(amortized cost 2019, $5,241,755; 2018, $7,373,911)
|
|
$
|
5,534,270
|
|
|
$
|
7,515,318
|
|
Equity securities, at fair value
|
|
100,143
|
|
|
111,750
|
|
Limited partnership interests
|
|
351,515
|
|
|
328,516
|
|
Short-term and other investments
|
|
433,688
|
|
|
295,093
|
|
Total investments
|
|
6,419,616
|
|
|
8,250,677
|
|
Cash
|
|
7,616
|
|
|
11,906
|
|
Deferred policy acquisition costs
|
|
279,041
|
|
|
298,742
|
|
Deposit asset on reinsurance
|
|
2,315,330
|
|
|
—
|
|
Goodwill
|
|
29,458
|
|
|
47,396
|
|
Other assets
|
|
417,460
|
|
|
422,047
|
|
Separate Account (variable annuity) assets
|
|
2,310,886
|
|
|
2,001,128
|
|
Total assets
|
|
$
|
11,779,407
|
|
|
$
|
11,031,896
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
Policy liabilities
|
|
|
|
|
Investment contract and life policy reserves
|
|
$
|
5,776,769
|
|
|
$
|
5,711,193
|
|
Unpaid claims and claim expenses
|
|
398,339
|
|
|
396,714
|
|
Unearned premiums
|
|
270,163
|
|
|
276,225
|
|
Total policy liabilities
|
|
6,445,271
|
|
|
6,384,132
|
|
Other policyholder funds
|
|
821,880
|
|
|
767,988
|
|
Other liabilities
|
|
403,812
|
|
|
290,358
|
|
Long-term debt
|
|
297,881
|
|
|
297,740
|
|
Separate Account (variable annuity) liabilities
|
|
2,310,886
|
|
|
2,001,128
|
|
Total liabilities
|
|
10,279,730
|
|
|
9,741,346
|
|
Preferred stock, $0.001 par value, authorized
1,000,000 shares; none issued
|
|
—
|
|
|
—
|
|
Common stock, $0.001 par value, authorized 75,000,000 shares;
issued, 2019, 66,036,205; 2018, 65,820,369
|
|
66
|
|
|
66
|
|
Additional paid-in capital
|
|
476,353
|
|
|
475,109
|
|
Retained earnings
|
|
1,318,329
|
|
|
1,216,582
|
|
Accumulated other comprehensive income (loss), net of tax:
|
|
|
|
|
|
Net unrealized investment gains on fixed maturity securities
|
|
203,077
|
|
|
96,941
|
|
Net funded status of benefit plans
|
|
(12,185
|
)
|
|
(12,185
|
)
|
Treasury stock, at cost, 2019, 24,850,484 shares;
2018, 24,850,484 shares
|
|
(485,963
|
)
|
|
(485,963
|
)
|
Total shareholders’ equity
|
|
1,499,677
|
|
|
1,290,550
|
|
Total liabilities and shareholders’ equity
|
|
$
|
11,779,407
|
|
|
$
|
11,031,896
|
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
($ in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract charges earned
|
|
$
|
208,096
|
|
|
$
|
205,610
|
|
|
$
|
417,881
|
|
|
$
|
408,608
|
|
Net investment income
|
|
93,458
|
|
|
97,101
|
|
|
186,258
|
|
|
188,965
|
|
Net investment gains (losses)
|
|
146,333
|
|
|
735
|
|
|
153,750
|
|
|
(919
|
)
|
Other income
|
|
3,591
|
|
|
2,811
|
|
|
6,802
|
|
|
5,092
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
451,478
|
|
|
306,257
|
|
|
764,691
|
|
|
601,746
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
152,692
|
|
|
168,278
|
|
|
292,076
|
|
|
311,840
|
|
Interest credited
|
|
53,594
|
|
|
51,071
|
|
|
106,516
|
|
|
101,105
|
|
DAC amortization expense
|
|
31,648
|
|
|
26,586
|
|
|
56,621
|
|
|
53,291
|
|
Operating expenses
|
|
55,252
|
|
|
50,218
|
|
|
109,305
|
|
|
98,387
|
|
Interest expense
|
|
3,312
|
|
|
3,291
|
|
|
6,615
|
|
|
6,464
|
|
Other expense
|
|
28,025
|
|
|
—
|
|
|
28,025
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
324,523
|
|
|
299,444
|
|
|
599,158
|
|
|
571,087
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
126,955
|
|
|
6,813
|
|
|
165,533
|
|
|
30,659
|
|
Income tax expense
|
|
33,133
|
|
|
896
|
|
|
39,545
|
|
|
4,587
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
93,822
|
|
|
$
|
5,917
|
|
|
$
|
125,988
|
|
|
$
|
26,072
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
2.25
|
|
|
$
|
0.14
|
|
|
$
|
3.02
|
|
|
$
|
0.63
|
|
Diluted
|
|
$
|
2.24
|
|
|
$
|
0.14
|
|
|
$
|
3.01
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares
and equivalent shares
|
|
|
|
|
|
|
|
|
Basic
|
|
41,762
|
|
|
41,600
|
|
|
41,685
|
|
|
41,531
|
|
Diluted
|
|
41,921
|
|
|
41,735
|
|
|
41,851
|
|
|
41,659
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
|
|
|
|
|
|
|
Total other-than-temporary impairment losses
on securities
|
|
$
|
(34
|
)
|
|
$
|
(1,177
|
)
|
|
$
|
(271
|
)
|
|
$
|
(1,287
|
)
|
Portion of losses recognized in other
comprehensive income (loss)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net other-than-temporary impairment losses
on securities recognized in earnings
|
|
(34
|
)
|
|
(1,177
|
)
|
|
(271
|
)
|
|
(1,287
|
)
|
Sales and other, net
|
|
142,067
|
|
|
1,789
|
|
|
146,905
|
|
|
3,992
|
|
Change in fair value - equity securities
|
|
3,441
|
|
|
(1,156
|
)
|
|
6,948
|
|
|
(6,342
|
)
|
Change in fair value and gains realized
on settlements - derivative instruments
|
|
859
|
|
|
1,279
|
|
|
168
|
|
|
2,718
|
|
Total
|
|
$
|
146,333
|
|
|
$
|
735
|
|
|
$
|
153,750
|
|
|
$
|
(919
|
)
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
93,822
|
|
|
$
|
5,917
|
|
|
$
|
125,988
|
|
|
$
|
26,072
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
Change in net unrealized investment gains
(losses) on fixed maturity securities
|
|
(7,762
|
)
|
|
(52,444
|
)
|
|
106,136
|
|
|
(159,540
|
)
|
Change in net funded status of benefit plans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cumulative effect of change in accounting principle
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,041
|
)
|
Other comprehensive income (loss)
|
|
(7,762
|
)
|
|
(52,444
|
)
|
|
106,136
|
|
|
(174,581
|
)
|
Total
|
|
$
|
86,060
|
|
|
$
|
(46,527
|
)
|
|
$
|
232,124
|
|
|
$
|
(148,509
|
)
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
($ in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Common stock, $0.001 par value
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
66
|
|
|
$
|
66
|
|
|
$
|
66
|
|
|
$
|
65
|
|
Options exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Conversion of common stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Conversion of restricted stock units
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Ending balance
|
|
66
|
|
|
66
|
|
|
66
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
474,336
|
|
|
466,277
|
|
|
475,109
|
|
|
464,246
|
|
Options exercised and conversion of common stock
units and restricted stock units
|
|
344
|
|
|
2,384
|
|
|
(1,761
|
)
|
|
2,259
|
|
Share-based compensation expense
|
|
1,673
|
|
|
1,991
|
|
|
3,005
|
|
|
4,147
|
|
Ending balance
|
|
476,353
|
|
|
470,652
|
|
|
476,353
|
|
|
470,652
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
1,236,621
|
|
|
1,254,394
|
|
|
1,216,582
|
|
|
1,231,177
|
|
Net income
|
|
93,822
|
|
|
5,917
|
|
|
125,988
|
|
|
26,072
|
|
Dividends, 2019, $0.2875, $0.5750 per share;
2018, $0.2850, $0.5700 per share
|
|
(12,114
|
)
|
|
(12,006
|
)
|
|
(24,241
|
)
|
|
(23,985
|
)
|
Cumulative effect of change in accounting principle
|
|
—
|
|
|
—
|
|
|
—
|
|
|
15,041
|
|
Ending balance
|
|
1,318,329
|
|
|
1,248,305
|
|
|
1,318,329
|
|
|
1,248,305
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss),
net of tax:
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
198,654
|
|
|
164,823
|
|
|
84,756
|
|
|
286,960
|
|
Change in net unrealized investment gains
on fixed maturity securities
|
|
(7,762
|
)
|
|
(52,444
|
)
|
|
106,136
|
|
|
(159,540
|
)
|
Change in net funded status of benefit plans
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Cumulative effect of change in accounting principle
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,041
|
)
|
Ending balance
|
|
190,892
|
|
|
112,379
|
|
|
190,892
|
|
|
112,379
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
(485,963
|
)
|
|
(480,881
|
)
|
|
(485,963
|
)
|
|
(480,875
|
)
|
Acquisition of shares
|
|
—
|
|
|
(80
|
)
|
|
—
|
|
|
(86
|
)
|
Ending balance
|
|
(485,963
|
)
|
|
(480,961
|
)
|
|
(485,963
|
)
|
|
(480,961
|
)
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity at end of period
|
|
$
|
1,499,677
|
|
|
$
|
1,350,441
|
|
|
$
|
1,499,677
|
|
|
$
|
1,350,441
|
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
($ in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
Cash flows - operating activities
|
|
|
|
|
Premiums collected
|
|
$
|
396,887
|
|
|
$
|
392,103
|
|
Policyholder benefits paid
|
|
(275,437
|
)
|
|
(272,769
|
)
|
Policy acquisition and other operating expenses paid
|
|
(161,863
|
)
|
|
(141,620
|
)
|
Income taxes paid
|
|
(78
|
)
|
|
(7,393
|
)
|
Investment income collected
|
|
139,210
|
|
|
184,749
|
|
Interest expense paid
|
|
(6,440
|
)
|
|
(6,190
|
)
|
Other
|
|
5,557
|
|
|
2,429
|
|
Net cash provided by operating activities
|
|
97,836
|
|
|
151,309
|
|
|
|
|
|
|
Cash flows - investing activities
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
Purchases
|
|
(644,104
|
)
|
|
(551,984
|
)
|
Sales
|
|
501,739
|
|
|
190,023
|
|
Maturities, paydowns, calls and redemptions
|
|
342,998
|
|
|
383,090
|
|
Equity securities
|
|
|
|
|
Purchases
|
|
(5,282
|
)
|
|
(6,028
|
)
|
Sales and repayments
|
|
17,122
|
|
|
5,783
|
|
Limited partnership interests
|
|
|
|
|
Purchases
|
|
(29,357
|
)
|
|
(33,031
|
)
|
Sales
|
|
15,029
|
|
|
9,457
|
|
Change in short-term and other investments, net
|
|
(156,748
|
)
|
|
(109,711
|
)
|
Acquisition of business, net of cash acquired
|
|
(18,198
|
)
|
|
—
|
|
Net cash provided by (used in) investing activities
|
|
23,199
|
|
|
(112,401
|
)
|
|
|
|
|
|
Cash flows - financing activities
|
|
|
|
|
|
|
Dividends paid to shareholders
|
|
(23,630
|
)
|
|
(23,320
|
)
|
Acquisition of treasury stock
|
|
—
|
|
|
(86
|
)
|
Proceeds from exercise of stock options
|
|
722
|
|
|
2,460
|
|
Withholding tax payments on RSUs tendered
|
|
(3,366
|
)
|
|
(2,155
|
)
|
Annuity contracts: variable, fixed and FHLB funding agreements
|
|
|
|
|
|
|
Deposits
|
|
266,310
|
|
|
199,074
|
|
Benefits, withdrawals and net transfers to
Separate Account (variable annuity) assets
|
|
(214,243
|
)
|
|
(218,694
|
)
|
Life policy accounts
|
|
|
|
|
|
Deposits
|
|
4,638
|
|
|
3,163
|
|
Withdrawals and surrenders
|
|
(1,733
|
)
|
|
(2,525
|
)
|
Change in deposit asset on reinsurance, net
|
|
(134,682
|
)
|
|
—
|
|
Change in book overdrafts
|
|
(19,341
|
)
|
|
3,795
|
|
Net cash used in financing activities
|
|
(125,325
|
)
|
|
(38,288
|
)
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
(4,290
|
)
|
|
620
|
|
|
|
|
|
|
Cash at beginning of period
|
|
11,906
|
|
|
7,627
|
|
|
|
|
|
|
Cash at end of period
|
|
$
|
7,616
|
|
|
$
|
8,247
|
|
See Notes to Consolidated Financial Statements.
HORACE MANN EDUCATORS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30,
2019
and
2018
($ in thousands, except per share data and unless noted otherwise)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements of Horace Mann Educators Corporation (HMEC; and together with its subsidiaries, the Company or Horace Mann) have been prepared in conformity with accounting principles generally accepted in the U.S. (GAAP) and with the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in annual financial statements prepared in conformity with GAAP, but are not required for interim reporting purposes, have been omitted. The Company believes that these consolidated financial statements contain all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to present fairly the Company’s consolidated financial position as of
June 30, 2019
, the consolidated results of operations, comprehensive income (loss), changes in shareholders’ equity and cash flows for the
six
month periods ended
June 30, 2019
and
2018
. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The subsidiaries of HMEC market and underwrite personal lines of property and casualty insurance products (primarily personal lines of automobile and property insurance), retirement products (primarily tax-qualified annuities) and life insurance, primarily to K-12 teachers, administrators and other employees of public schools and their families. HMEC’s principal operating subsidiaries are Horace Mann Life Insurance Company, Horace Mann Insurance Company, Teachers Insurance Company, Horace Mann Property & Casualty Insurance Company and Horace Mann Lloyds.
These consolidated financial statements should be read in conjunction with the consolidated financial statements and the related notes to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
The results of operations for the
three and six
month periods ended
June 30, 2019
are not necessarily indicative of the results to be expected for the full year.
Investment Contract and Life Policy Reserves
The following table summarizes investment contract and life policy reserves.
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2019
|
|
December 31, 2018
|
Investment contract reserves
|
|
$
|
4,605,272
|
|
|
$
|
4,555,856
|
|
Life policy reserves
|
|
1,171,497
|
|
|
1,155,337
|
|
Total
|
|
$
|
5,776,769
|
|
|
$
|
5,711,193
|
|
Note 1 - Basis of Presentation (Continued)
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) (AOCI) represents the accumulated change in shareholders’ equity from transactions and other events and circumstances from non-shareholder sources. For the Company, AOCI includes the after tax change in net unrealized investment gains (losses) on fixed maturity securities and the after tax change in net funded status of benefit plans for the periods as shown in the Consolidated Statements of Changes in Shareholders’ Equity. The following tables reconcile these components.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities
(1)(2)
|
|
Net Funded Status of
Benefit Plans
(1)
|
|
Total
(1)
|
Beginning balance, April 1, 2019
|
|
$
|
210,839
|
|
|
$
|
(12,185
|
)
|
|
$
|
198,654
|
|
Other comprehensive income (loss) before reclassifications
|
|
107,163
|
|
|
—
|
|
|
107,163
|
|
Amounts reclassified from AOCI
|
|
(114,925
|
)
|
|
—
|
|
|
(114,925
|
)
|
Net current period other comprehensive income (loss)
|
|
(7,762
|
)
|
|
—
|
|
|
(7,762
|
)
|
Ending balance, June 30, 2019
|
|
$
|
203,077
|
|
|
$
|
(12,185
|
)
|
|
$
|
190,892
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2019
|
|
$
|
96,941
|
|
|
$
|
(12,185
|
)
|
|
$
|
84,756
|
|
Other comprehensive income (loss) before reclassifications
|
|
227,466
|
|
|
—
|
|
|
227,466
|
|
Amounts reclassified from AOCI
|
|
(121,330
|
)
|
|
—
|
|
|
(121,330
|
)
|
Net current period other comprehensive income (loss)
|
|
106,136
|
|
|
—
|
|
|
106,136
|
|
Ending balance, June 30, 2019
|
|
$
|
203,077
|
|
|
$
|
(12,185
|
)
|
|
$
|
190,892
|
|
________________
|
|
(1)
|
All amounts are net of tax.
|
|
|
(2)
|
The pretax amounts reclassified from AOCI,
$145,474 thousand
and
$153,582 thousand
, are included in net investment gains (losses) and the related income tax expenses,
$30,549 thousand
and
$32,252 thousand
, are included in income tax expense in the Consolidated Statements of Operations for the
three and six
month periods ended
June 30, 2019
, respectively.
|
Note 1 - Basis of Presentation (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Net Unrealized Investment
Gains (Losses)
on Fixed Maturity Securities
(1)(2)
|
|
Net Funded Status of
Benefit Plans
(1)
|
|
Total
(1)(3)
|
Beginning balance, April 1, 2018,
|
|
$
|
178,040
|
|
|
$
|
(13,217
|
)
|
|
$
|
164,823
|
|
Other comprehensive income (loss) before reclassifications
|
|
(52,873
|
)
|
|
—
|
|
|
(52,873
|
)
|
Amounts reclassified from AOCI
|
|
429
|
|
|
—
|
|
|
429
|
|
Net current period other comprehensive income (loss)
|
|
(52,444
|
)
|
|
—
|
|
|
(52,444
|
)
|
Ending balance, June 30, 2018
|
|
$
|
125,596
|
|
|
$
|
(13,217
|
)
|
|
$
|
112,379
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2018
|
|
$
|
300,177
|
|
|
$
|
(13,217
|
)
|
|
$
|
286,960
|
|
Other comprehensive income (loss) before reclassifications
|
|
(162,412
|
)
|
|
—
|
|
|
(162,412
|
)
|
Amounts reclassified from AOCI
|
|
2,872
|
|
|
—
|
|
|
2,872
|
|
Cumulative effect of change in accounting principle
(3)
|
|
(15,041
|
)
|
|
—
|
|
|
(15,041
|
)
|
Net current period other comprehensive income (loss)
|
|
(174,581
|
)
|
|
—
|
|
|
(174,581
|
)
|
Ending balance, June 30, 2018
|
|
$
|
125,596
|
|
|
$
|
(13,217
|
)
|
|
$
|
112,379
|
|
________________
|
|
(1)
|
All amounts are net of tax.
|
|
|
(2)
|
The pretax amounts reclassified from AOCI,
$(544) thousand
and
$(3,636) thousand
, are included in Net investment gains (losses) and the related income tax expenses,
$(115) thousand
and
$(764) thousand
, are included in Income tax expense in the Consolidated Statements of Operations for the
three and six
month periods ended
June 30, 2018
, respectively.
|
|
|
(3)
|
The Company adopted guidance on January 1, 2018 that resulted in reclassifying
$15,041 thousand
of after tax net unrealized gains on equity securities from AOCI to Retained earnings.
|
Comparative information for elements that are not required to be reclassified in their entirety to net income in the same reporting period is disclosed in Note 3.
Adopted Accounting Standards
Accounting for Leases
Effective for the quarter ended March 31, 2019, the Company adopted guidance for leases and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance. The Company elected to apply all practical expedients in the guidance for transition for leases in effect at adoption, including using hindsight to determine the lease term of existing leases, the option to not reassess whether an existing contract is a lease or contains a lease and whether the lease is an operating or finance lease. The adoption of the guidance resulted in the Company recognizing an initial
$14,499 thousand
lease liability equal to the present value of lease payments and an initial
$13,908 thousand
right-of-use (ROU) asset, which is the corresponding lease liability adjusted for qualifying accrued lease payments. The lease liability and ROU asset are reported in Other liabilities and Other assets on the Consolidated Balance Sheets. The impact of these changes at adoption had no impact on net income or shareholders' equity
.
Simplifying the Test for Goodwill Impairment
Effective for the quarter ended June 30, 2019, the Company adopted guidance to simplify the accounting for goodwill impairment. Adoption of this guidance removed Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill.
Note 1 - Basis of Presentation (Continued)
Pending Accounting Standards
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued guidance to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments, including reinsurance receivables, held by companies. The new guidance replaces the incurred loss impairment methodology for financial instruments other than available for sale debt securities and requires an organization to measure and recognize all current expected credit losses (CECL) for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will need to utilize forward-looking information to better estimate their credit losses. Companies will continue to use judgment to determine which loss estimation method is appropriate for their circumstances. Any credit losses related to available for sale debt securities will be recorded through an allowance for credit losses with this allowance having a limit equal to the amount by which fair value is below amortized cost. The guidance also requires enhanced qualitative and quantitative disclosures to provide additional information about the amounts recorded in the financial statements.
This guidance is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the guidance will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance will have the most impact on the Company’s available for sale fixed maturity securities portfolio. However, as the Company’s fixed maturity securities portfolio is weighted towards higher rated bonds (97.1% investment grade, based on fair value, with an average quality rating of A+ at June 30, 2019), the Company does not expect that the effect of adoption will be material.
Accounting for Long-Duration Insurance Contracts
In August 2018, the FASB issued accounting and disclosure guidance that contains targeted improvements to the accounting for long-duration insurance contracts. Under the new guidance, the cash flow assumptions used to measure the liability for future policy benefits for traditional insurance contracts will be required to be updated at least annually with changes recognized as a benefit expense (i.e., assumptions will no longer be locked-in). Insurance entities will be required to use a standard discount rate to measure the liabilities that will be equivalent to the yield from a high-quality bond. The new guidance also changes the amortization of deferred acquisition costs (DAC) to be on a constant-level basis over the expected term of the related contracts with no interest accruing on the DAC balance. The new guidance also introduces a new category of contract features associated with deposit type contracts referred to as market risk benefits (MRBs). Contract features meeting the definition of a MRB will be measured at fair value. New disclosures will be required for long-duration insurance contracts in order to provide better transparency into the exposure of insurance entities and the drivers of their results. For public business entities, the guidance is effective for annual reporting periods beginning after December 15, 2020, including interim periods within those years. With regards to the liability for future policy benefits and DAC, the guidance applies to contracts in force as of the beginning of the earliest period presented and may be applied retrospectively. With regards to MRBs, the guidance is to be applied retrospectively at the beginning of the earliest period presented. Early adoption is permitted. Management is evaluating the impact this guidance will have on the results of operations and financial position of the Company.
The Company and Benefit Consultants Group, Inc. (BCG) entered into a Stock Purchase Agreement under which the Company acquired all of the outstanding capital stock of BCG with a transaction valued at
$25 million
. The acquisition was approved by the Company’s Board and closed on January 2, 2019. The acquisition of BCG gave rise to recognition of intangible assets of
$16.2 million
and goodwill of
$10.1 million
as a result of the purchase accounting. The intangible assets are reported as Other assets in the Consolidated Balance Sheets. Intangible assets that are amortizable have lives of
10
to
16
years.
On July 1, 2019, the Company completed its acquisition of all the equity interests in National Teachers Associates Life Insurance Company (NTA) pursuant to a Purchase Agreement (Agreement) dated as of December 10, 2018, by and among the Company and Ellard Family Holdings, Inc., Brian M. Ellard and The JCE Exempt Trust. The purchase price of the transaction was
$425 million
which includes
$20 million
representing NTA’s share of "adjusted earnings" (as determined in accordance with the terms of the Agreement) from July 1, 2018 to July 1, 2019. As a result of the acquisition, NTA became a wholly owned subsidiary of the Company. NTA provides supplemental insurance products, including heart and cancer, to the education market. NTA's results will be reported in a newly created operating segment titled "Supplemental".
Fixed Maturity Securities
The Company’s investment portfolio is comprised primarily of fixed maturity securities. Amortized cost, net unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
June 30, 2019
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
(1)
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
550,059
|
|
|
$
|
37,900
|
|
|
$
|
1,201
|
|
|
$
|
586,758
|
|
Other, including U.S. Treasury securities
|
|
546,396
|
|
|
20,574
|
|
|
533
|
|
|
566,437
|
|
Municipal bonds
|
|
1,472,794
|
|
|
127,700
|
|
|
801
|
|
|
1,599,693
|
|
Foreign government bonds
|
|
45,303
|
|
|
2,064
|
|
|
—
|
|
|
47,367
|
|
Corporate bonds
|
|
1,226,962
|
|
|
96,535
|
|
|
2,211
|
|
|
1,321,286
|
|
Other mortgage-backed securities
|
|
1,400,241
|
|
|
20,786
|
|
|
8,298
|
|
|
1,412,729
|
|
Totals
|
|
$
|
5,241,755
|
|
|
$
|
305,559
|
|
|
$
|
13,044
|
|
|
$
|
5,534,270
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
(1)
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
778,038
|
|
|
$
|
22,724
|
|
|
$
|
13,321
|
|
|
$
|
787,441
|
|
Other, including U.S. Treasury securities
|
|
835,096
|
|
|
16,127
|
|
|
17,681
|
|
|
833,542
|
|
Municipal bonds
|
|
1,884,313
|
|
|
133,150
|
|
|
13,494
|
|
|
2,003,969
|
|
Foreign government bonds
|
|
83,343
|
|
|
2,321
|
|
|
760
|
|
|
84,904
|
|
Corporate bonds
|
|
2,054,105
|
|
|
64,296
|
|
|
38,891
|
|
|
2,079,510
|
|
Other mortgage-backed securities
|
|
1,739,016
|
|
|
10,467
|
|
|
23,531
|
|
|
1,725,952
|
|
Totals
|
|
$
|
7,373,911
|
|
|
$
|
249,085
|
|
|
$
|
107,678
|
|
|
$
|
7,515,318
|
|
________________
|
|
(1)
|
Fair value includes securities issued by Federal National Mortgage Association (FNMA) of
$370,182 thousand
and
$441,308 thousand
; Federal Home Loan Mortgage Corporation (FHLMC) of
$256,531 thousand
and
$417,308 thousand
; and Government National Mortgage Association (GNMA) of
$79,141 thousand
and
$96,466 thousand
as of
June 30, 2019
and
December 31, 2018
, respectively.
|
Note 3 - Investments (Continued)
The following table presents the fair value and gross unrealized losses of securities in an unrealized loss position at
June 30, 2019
and
December 31, 2018
, respectively. The Company views the decrease in fair value of all of the securities with unrealized losses at
June 30, 2019
-- which was driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition -- as temporary. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of their amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. Therefore, it was determined that the unrealized losses on the securities presented in the table below were not other-than-temporarily impaired as of
June 30, 2019
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
12 Months or Less
|
|
More than 12 Months
|
|
Total
|
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
10,504
|
|
|
$
|
27
|
|
|
$
|
44,564
|
|
|
$
|
1,174
|
|
|
$
|
55,068
|
|
|
$
|
1,201
|
|
Other
|
|
11,463
|
|
|
32
|
|
|
37,575
|
|
|
501
|
|
|
49,038
|
|
|
533
|
|
Municipal bonds
|
|
16,900
|
|
|
93
|
|
|
34,031
|
|
|
708
|
|
|
50,931
|
|
|
801
|
|
Foreign government bonds
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Corporate bonds
|
|
27,858
|
|
|
518
|
|
|
32,997
|
|
|
1,693
|
|
|
60,855
|
|
|
2,211
|
|
Other mortgage-backed securities
|
|
391,170
|
|
|
3,895
|
|
|
277,694
|
|
|
4,403
|
|
|
668,864
|
|
|
8,298
|
|
Total
|
|
$
|
457,895
|
|
|
$
|
4,565
|
|
|
$
|
426,861
|
|
|
$
|
8,479
|
|
|
$
|
884,756
|
|
|
$
|
13,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of positions with a
gross unrealized loss
|
|
143
|
|
|
|
|
156
|
|
|
|
|
299
|
|
|
|
Fair value as a percentage of total fixed
maturity securities fair value
|
|
8.3
|
%
|
|
|
|
7.7
|
%
|
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
193,447
|
|
|
$
|
5,026
|
|
|
$
|
157,295
|
|
|
$
|
8,295
|
|
|
$
|
350,742
|
|
|
$
|
13,321
|
|
Other
|
|
263,497
|
|
|
6,746
|
|
|
246,213
|
|
|
10,935
|
|
|
509,710
|
|
|
17,681
|
|
Municipal bonds
|
|
291,869
|
|
|
7,603
|
|
|
95,297
|
|
|
5,891
|
|
|
387,166
|
|
|
13,494
|
|
Foreign government bonds
|
|
16,250
|
|
|
760
|
|
|
—
|
|
|
—
|
|
|
16,250
|
|
|
760
|
|
Corporate bonds
|
|
818,519
|
|
|
27,429
|
|
|
99,171
|
|
|
11,462
|
|
|
917,690
|
|
|
38,891
|
|
Other mortgage-backed securities
|
|
913,858
|
|
|
16,076
|
|
|
291,442
|
|
|
7,455
|
|
|
1,205,300
|
|
|
23,531
|
|
Total
|
|
$
|
2,497,440
|
|
|
$
|
63,640
|
|
|
$
|
889,418
|
|
|
$
|
44,038
|
|
|
$
|
3,386,858
|
|
|
$
|
107,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of positions with a
gross unrealized loss
|
|
1,052
|
|
|
|
|
359
|
|
|
|
|
1,411
|
|
|
|
Fair value as a percentage of total fixed
maturity securities fair value
|
|
33.2
|
%
|
|
|
|
11.8
|
%
|
|
|
|
45.0
|
%
|
|
|
Fixed maturity securities with an investment grade rating represented
84.0%
of the gross unrealized losses as of
June 30, 2019
. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below their amortized cost bases.
Note 3 - Investments (Continued)
Limited Partnership Interests
As of
June 30, 2019
and
December 31, 2018
, the carrying value of equity method limited partnerships totaled
$351,515 thousand
and
$328,516 thousand
, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.
Credit Losses
The following table summarizes the cumulative amounts related to the Company’s credit loss component of other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of
June 30, 2019
and
2018
that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of OTTI losses were recognized in OCI:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
Cumulative credit loss
(1)
|
|
|
|
|
Beginning of period
|
|
$
|
1,529
|
|
|
$
|
3,825
|
|
New credit losses
|
|
—
|
|
|
—
|
|
Increases to previously recognized credit losses
|
|
—
|
|
|
246
|
|
Losses related to securities sold or paid down during the period
|
|
—
|
|
|
—
|
|
End of period
|
|
$
|
1,529
|
|
|
$
|
4,071
|
|
________________
|
|
(1)
|
The cumulative credit loss amounts exclude OTTI losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before the recovery of the amortized cost basis.
|
Maturities of Fixed Maturity Securities
The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Percent of Total Fair Value
|
|
June 30, 2019
|
|
|
June 30, 2019
|
|
December 31, 2018
|
|
Fair
Value
|
|
Amortized
Cost
|
Estimated expected maturity:
|
|
|
|
|
|
|
|
|
Due in 1 year or less
|
|
4.7
|
%
|
|
4.8
|
%
|
|
$
|
258,331
|
|
|
$
|
252,586
|
|
Due after 1 year through 5 years
|
|
26.7
|
%
|
|
22.8
|
%
|
|
1,478,291
|
|
|
1,439,296
|
|
Due after 5 years through 10 years
|
|
29.6
|
%
|
|
32.8
|
%
|
|
1,638,887
|
|
|
1,555,825
|
|
Due after 10 years through 20 years
|
|
25.6
|
%
|
|
26.5
|
%
|
|
1,414,857
|
|
|
1,316,715
|
|
Due after 20 years
|
|
13.4
|
%
|
|
13.1
|
%
|
|
743,904
|
|
|
677,333
|
|
Total
|
|
100.0
|
%
|
|
100.0
|
%
|
|
$
|
5,534,270
|
|
|
$
|
5,241,755
|
|
|
|
|
|
|
|
|
|
|
Average option-adjusted duration, in years
|
|
5.6
|
|
|
5.9
|
|
|
|
|
|
Note 3 - Investments (Continued)
Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
(1)
|
|
2018
|
|
2019
(1)
|
|
2018
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
$
|
442,015
|
|
|
$
|
100,129
|
|
|
$
|
501,739
|
|
|
$
|
190,023
|
|
Gross gains realized
|
|
147,774
|
|
|
2,352
|
|
|
148,316
|
|
|
4,022
|
|
Gross losses realized
|
|
(5,976
|
)
|
|
(1,584
|
)
|
|
(6,081
|
)
|
|
(1,637
|
)
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
Proceeds received
|
|
$
|
1,633
|
|
|
$
|
3,735
|
|
|
$
|
17,122
|
|
|
$
|
5,783
|
|
Gross gains realized
|
|
389
|
|
|
977
|
|
|
5,134
|
|
|
1,593
|
|
Gross losses realized
|
|
(166
|
)
|
|
(147
|
)
|
|
(510
|
)
|
|
(181
|
)
|
________________
|
|
(1)
|
Gross gains realized presented above include a
$135.3 million
realized investment gain associated with a transfer of investments to a reinsurer as consideration paid during the second quarter of 2019 in connection with the reinsurance of a
$2.9 billion
block of in force fixed and variable annuity business. See Notes 6 and 13 for further information.
|
Net Investment Gains (Losses)
The following table reconciles net investment gains (losses) pretax by transaction type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Impairment write-downs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Change in intent write-downs
|
|
(34
|
)
|
|
(1,177
|
)
|
|
(271
|
)
|
|
(1,287
|
)
|
Net OTTI losses recognized in earnings
|
|
(34
|
)
|
|
(1,177
|
)
|
|
(271
|
)
|
|
(1,287
|
)
|
Sales and other, net
|
|
142,067
|
|
|
1,789
|
|
|
146,905
|
|
|
3,992
|
|
Change in fair value - equity securities
|
|
3,441
|
|
|
(1,156
|
)
|
|
6,948
|
|
|
(6,342
|
)
|
Change in fair value and gains (losses) realized
on settlements - derivative instruments
|
|
859
|
|
|
1,279
|
|
|
168
|
|
|
2,718
|
|
Net investment gains (losses)
|
|
$
|
146,333
|
|
|
$
|
735
|
|
|
$
|
153,750
|
|
|
$
|
(919
|
)
|
Note 3 - Investments (Continued)
Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities
The following table reconciles net unrealized investment gains (losses) on fixed maturity securities, net of tax, included in AOCI, before the impact of DAC:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net unrealized investment gains (losses)
on fixed maturity securities, net of tax
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
$
|
245,319
|
|
|
$
|
206,293
|
|
|
$
|
111,712
|
|
|
$
|
286,176
|
|
Change in net unrealized investment gains
(losses) on fixed maturity securities
|
|
100,693
|
|
|
(61,724
|
)
|
|
240,705
|
|
|
(129,009
|
)
|
Reclassification of net investment (gains) losses
on securities to net income
|
|
(114,925
|
)
|
|
429
|
|
|
(121,330
|
)
|
|
2,872
|
|
Cumulative effect of change in accounting principle
(1)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,041
|
)
|
End of period
|
|
$
|
231,087
|
|
|
$
|
144,998
|
|
|
$
|
231,087
|
|
|
$
|
144,998
|
|
________________
|
|
(1)
|
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and the related net unrealized gains were reclassified from AOCI to Retained earnings.
|
Offsetting of Assets and Liabilities
The Company’s derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds have been reached.
The following table presents instruments that were subject to a master netting arrangement for the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Gross
Amounts
Offset in the
|
|
Net Amounts
of Assets/
Liabilities
Presented
in the
|
|
Gross Amounts Not Offset
in the Consolidated
Balance Sheets
|
|
|
|
|
Gross
Amounts
|
|
Consolidated
Balance
Sheets
|
|
Consolidated
Balance
Sheets
|
|
Financial
Instruments
|
|
Cash
Collateral
Received
|
|
Net
Amount
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
$
|
8,753
|
|
|
$
|
—
|
|
|
$
|
8,753
|
|
|
$
|
—
|
|
|
$
|
8,663
|
|
|
$
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Free-standing derivatives
|
|
$
|
2,647
|
|
|
$
|
—
|
|
|
$
|
2,647
|
|
|
$
|
—
|
|
|
$
|
1,868
|
|
|
$
|
779
|
|
Note 3 - Investments (Continued)
Deposits
At
June 30, 2019
and
December 31, 2018
, fixed maturity securities with a fair value of
$18,073 thousand
and
$17,695 thousand
, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at
June 30, 2019
and
December 31, 2018
, fixed maturity securities with a fair value of
$787,421 thousand
and
$740,016 thousand
, respectively, were on deposit with the Federal Home Loan Bank of Chicago (FHLB) as collateral for amounts subject to funding agreements, advances and borrowings which were equal to
$725,000 thousand
at
June 30, 2019
and
$675,000 thousand
at
December 31, 2018
. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.
Note 4 - Fair Value of Financial Instruments
The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company’s insurance contracts other than annuity contracts (which are investment contracts) are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company’s overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.
Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at each reporting date is included in Note 3 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
Note 4 - Fair Value of Financial Instruments (Continued)
Financial Instruments Measured and Carried at Fair Value
The following table presents the Company’s fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At
June 30, 2019
, Level 3 invested assets comprised
4.0%
of the Company’s total investment portfolio at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Fair Value Measurements at
|
|
|
Carrying
|
|
Fair
|
|
Reporting Date Using
|
|
|
Amount
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
586,758
|
|
|
$
|
586,758
|
|
|
$
|
—
|
|
|
$
|
584,070
|
|
|
$
|
2,688
|
|
Other, including U.S. Treasury securities
|
|
566,437
|
|
|
566,437
|
|
|
16,288
|
|
|
550,149
|
|
|
—
|
|
Municipal bonds
|
|
1,599,693
|
|
|
1,599,693
|
|
|
—
|
|
|
1,552,709
|
|
|
46,984
|
|
Foreign government bonds
|
|
47,367
|
|
|
47,367
|
|
|
—
|
|
|
47,367
|
|
|
—
|
|
Corporate bonds
|
|
1,321,286
|
|
|
1,321,286
|
|
|
13,997
|
|
|
1,228,067
|
|
|
79,222
|
|
Other mortgage-backed securities
|
|
1,412,729
|
|
|
1,412,729
|
|
|
—
|
|
|
1,286,979
|
|
|
125,750
|
|
Total fixed maturity securities
|
|
5,534,270
|
|
|
5,534,270
|
|
|
30,285
|
|
|
5,249,341
|
|
|
254,644
|
|
Equity securities
|
|
100,143
|
|
|
100,143
|
|
|
57,530
|
|
|
42,544
|
|
|
69
|
|
Short-term investments
|
|
247,872
|
|
|
247,872
|
|
|
246,872
|
|
|
1,000
|
|
|
—
|
|
Other investments
|
|
24,503
|
|
|
24,503
|
|
|
—
|
|
|
24,503
|
|
|
—
|
|
Totals
|
|
$
|
5,906,788
|
|
|
$
|
5,906,788
|
|
|
$
|
334,687
|
|
|
$
|
5,317,388
|
|
|
$
|
254,713
|
|
Separate Account (variable annuity) assets
(1)
|
|
$
|
2,310,886
|
|
|
$
|
2,310,886
|
|
|
$
|
2,310,886
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy
reserves, embedded derivatives
|
|
$
|
940
|
|
|
$
|
940
|
|
|
$
|
—
|
|
|
$
|
940
|
|
|
$
|
—
|
|
Other policyholder funds, embedded derivatives
|
|
$
|
85,961
|
|
|
$
|
85,961
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
85,961
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally
sponsored agency obligations:
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
787,441
|
|
|
$
|
787,441
|
|
|
$
|
—
|
|
|
$
|
784,224
|
|
|
$
|
3,217
|
|
Other, including U.S. Treasury securities
|
|
833,542
|
|
|
833,542
|
|
|
13,291
|
|
|
820,251
|
|
|
—
|
|
Municipal bonds
|
|
2,003,969
|
|
|
2,003,969
|
|
|
—
|
|
|
1,956,438
|
|
|
47,531
|
|
Foreign government bonds
|
|
84,904
|
|
|
84,904
|
|
|
—
|
|
|
84,904
|
|
|
—
|
|
Corporate bonds
|
|
2,079,510
|
|
|
2,079,510
|
|
|
12,281
|
|
|
1,986,487
|
|
|
80,742
|
|
Other mortgage-backed securities
|
|
1,725,952
|
|
|
1,725,952
|
|
|
—
|
|
|
1,608,958
|
|
|
116,994
|
|
Total fixed maturity securities
|
|
7,515,318
|
|
|
7,515,318
|
|
|
25,572
|
|
|
7,241,262
|
|
|
248,484
|
|
Equity securities
|
|
111,750
|
|
|
111,750
|
|
|
64,330
|
|
|
47,415
|
|
|
5
|
|
Short-term investments
|
|
122,222
|
|
|
122,222
|
|
|
117,296
|
|
|
4,926
|
|
|
—
|
|
Other investments
|
|
16,147
|
|
|
16,147
|
|
|
—
|
|
|
16,147
|
|
|
—
|
|
Totals
|
|
$
|
7,765,437
|
|
|
$
|
7,765,437
|
|
|
$
|
207,198
|
|
|
$
|
7,309,750
|
|
|
$
|
248,489
|
|
Separate Account (variable annuity) assets
(1)
|
|
$
|
2,001,128
|
|
|
$
|
2,001,128
|
|
|
$
|
2,001,128
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy
reserves, embedded derivatives
|
|
$
|
248
|
|
|
$
|
248
|
|
|
$
|
—
|
|
|
$
|
248
|
|
|
$
|
—
|
|
Other policyholder funds, embedded derivatives
|
|
$
|
78,700
|
|
|
$
|
78,700
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
78,700
|
|
________________
(1)
Separate Account (variable annuity) liabilities are equal to the estimated fair value of the Separate Account (variable annuity) assets.
Note 4 - Fair Value of Financial Instruments (Continued)
During the
six
month periods ended
June 30, 2019
and 2018, there were no transfers between Level 1 and Level 2. The following table presents reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Financial Assets
|
|
Financial
Liabilities
(1)
|
|
|
Municipal
Bonds
|
|
Corporate
Bonds
|
|
Other
Mortgage-
Backed
Securities
(2)
|
|
Total
Fixed
Maturity
Securities
|
|
Equity
Securities
|
|
Total
|
|
|
Beginning balance, April 1, 2019
|
|
$
|
47,756
|
|
|
$
|
82,482
|
|
|
$
|
135,790
|
|
|
$
|
266,028
|
|
|
$
|
5
|
|
|
$
|
266,033
|
|
|
$
|
84,629
|
|
Transfers into Level 3
(3)
|
|
—
|
|
|
2,808
|
|
|
—
|
|
|
2,808
|
|
|
64
|
|
|
2,872
|
|
|
—
|
|
Transfers out of Level 3
(3)
|
|
—
|
|
|
(4,876
|
)
|
|
—
|
|
|
(4,876
|
)
|
|
—
|
|
|
(4,876
|
)
|
|
—
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses) included in
net income related to financial assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net realized (gains) losses included in net
income related to financial liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
371
|
|
Net unrealized investment gains
(losses) included in OCI
|
|
(537
|
)
|
|
1,961
|
|
|
2,807
|
|
|
4,231
|
|
|
—
|
|
|
4,231
|
|
|
—
|
|
Purchases
|
|
—
|
|
|
1,566
|
|
|
—
|
|
|
1,566
|
|
|
—
|
|
|
1,566
|
|
|
—
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,431
|
|
Sales
|
|
—
|
|
|
—
|
|
|
(607
|
)
|
|
(607
|
)
|
|
—
|
|
|
(607
|
)
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Paydowns, maturities and distributions
|
|
(235
|
)
|
|
(4,719
|
)
|
|
(9,552
|
)
|
|
(14,506
|
)
|
|
—
|
|
|
(14,506
|
)
|
|
(1,470
|
)
|
Ending balance, June 30, 2019
|
|
$
|
46,984
|
|
|
$
|
79,222
|
|
|
$
|
128,438
|
|
|
$
|
254,644
|
|
|
$
|
69
|
|
|
$
|
254,713
|
|
|
$
|
85,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2019
|
|
$
|
47,531
|
|
|
$
|
80,742
|
|
|
$
|
120,211
|
|
|
$
|
248,484
|
|
|
$
|
5
|
|
|
$
|
248,489
|
|
|
$
|
78,700
|
|
Transfers into Level 3
(3)
|
|
—
|
|
|
5,882
|
|
|
21,934
|
|
|
27,816
|
|
|
64
|
|
|
27,880
|
|
|
—
|
|
Transfers out of Level 3
(3)
|
|
—
|
|
|
(4,876
|
)
|
|
—
|
|
|
(4,876
|
)
|
|
—
|
|
|
(4,876
|
)
|
|
—
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses) included in
net income related to financial assets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net realized (gains) losses included in net
income related to financial liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,705
|
|
Net unrealized investment gains
(losses) included in OCI
|
|
(193
|
)
|
|
4,510
|
|
|
2,655
|
|
|
6,972
|
|
|
—
|
|
|
6,972
|
|
|
—
|
|
Purchases
|
|
—
|
|
|
1,566
|
|
|
—
|
|
|
1,566
|
|
|
—
|
|
|
1,566
|
|
|
—
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,449
|
|
Sales
|
|
—
|
|
|
—
|
|
|
(607
|
)
|
|
(607
|
)
|
|
—
|
|
|
(607
|
)
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Paydowns, maturities and distributions
|
|
(354
|
)
|
|
(8,602
|
)
|
|
(15,755
|
)
|
|
(24,711
|
)
|
|
—
|
|
|
(24,711
|
)
|
|
(2,893
|
)
|
Ending balance, June 30, 2019
|
|
$
|
46,984
|
|
|
$
|
79,222
|
|
|
$
|
128,438
|
|
|
$
|
254,644
|
|
|
$
|
69
|
|
|
$
|
254,713
|
|
|
$
|
85,961
|
|
________________
|
|
(1)
|
Represents embedded derivatives, all related to the Company's fixed indexed annuity products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets.
|
|
|
(2)
|
Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.
|
|
|
(3)
|
Transfers into and out of Level 3 during the
three and six
month periods ended
June 30, 2019
were attributable to changes in the availability of observable market information for individual fixed maturity securities. The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.
|
Note 4 - Fair Value of Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Financial Assets
|
|
Financial
Liabilities
(1)
|
|
|
Municipal
Bonds
|
|
Corporate
Bonds
|
|
Other
Mortgage-
Backed
Securities
(2)
|
|
Total
Fixed
Maturity
Securities
|
|
Equity
Securities
|
|
Total
|
|
|
Beginning balance, April 1, 2018
|
|
$
|
49,748
|
|
|
$
|
78,780
|
|
|
$
|
115,334
|
|
|
$
|
243,862
|
|
|
$
|
6
|
|
|
$
|
243,868
|
|
|
$
|
78,486
|
|
Transfers into Level 3
(3)
|
|
—
|
|
|
29,709
|
|
|
18,322
|
|
|
48,031
|
|
|
—
|
|
|
48,031
|
|
|
—
|
|
Transfers out of Level 3
(3)
|
|
—
|
|
|
(11,279
|
)
|
|
(4,230
|
)
|
|
(15,509
|
)
|
|
—
|
|
|
(15,509
|
)
|
|
—
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses) included in
net income related to financial assets
|
|
—
|
|
|
(246
|
)
|
|
—
|
|
|
(246
|
)
|
|
—
|
|
|
(246
|
)
|
|
—
|
|
Net realized (gains) losses included in net
income related to financial liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,291
|
)
|
Net unrealized investment gains
(losses) included in OCI
|
|
397
|
|
|
(700
|
)
|
|
1,659
|
|
|
1,356
|
|
|
—
|
|
|
1,356
|
|
|
—
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,107
|
|
Sales
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Paydowns, maturities and distributions
|
|
(224
|
)
|
|
(3,601
|
)
|
|
(2,024
|
)
|
|
(5,849
|
)
|
|
—
|
|
|
(5,849
|
)
|
|
(1,514
|
)
|
Ending balance, June 30, 2018
|
|
$
|
49,921
|
|
|
$
|
92,663
|
|
|
$
|
129,061
|
|
|
$
|
271,645
|
|
|
$
|
6
|
|
|
$
|
271,651
|
|
|
$
|
77,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, January 1, 2018
|
|
$
|
49,328
|
|
|
$
|
72,979
|
|
|
$
|
107,944
|
|
|
$
|
230,251
|
|
|
$
|
6
|
|
|
$
|
230,257
|
|
|
$
|
80,733
|
|
Transfers into Level 3
(3)
|
|
—
|
|
|
40,487
|
|
|
33,144
|
|
|
73,631
|
|
|
—
|
|
|
73,631
|
|
|
—
|
|
Transfers out of Level 3
(3)
|
|
—
|
|
|
(11,279
|
)
|
|
(4,230
|
)
|
|
(15,509
|
)
|
|
—
|
|
|
(15,509
|
)
|
|
—
|
|
Total gains or losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment gains (losses) included in
net income related to financial assets
|
|
—
|
|
|
(246
|
)
|
|
—
|
|
|
(246
|
)
|
|
3
|
|
|
(243
|
)
|
|
—
|
|
Net (gains) losses included in net
income related to financial liabilities
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,513
|
)
|
Net unrealized investment gains
(losses) included in OCI
|
|
840
|
|
|
(1,587
|
)
|
|
637
|
|
|
(110
|
)
|
|
—
|
|
|
(110
|
)
|
|
—
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuances
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,439
|
|
Sales
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
—
|
|
Settlements
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Paydowns, maturities and distributions
|
|
(247
|
)
|
|
(7,691
|
)
|
|
(8,434
|
)
|
|
(16,372
|
)
|
|
—
|
|
|
(16,372
|
)
|
|
(2,871
|
)
|
Ending balance, June 30, 2018
|
|
$
|
49,921
|
|
|
$
|
92,663
|
|
|
$
|
129,061
|
|
|
$
|
271,645
|
|
|
$
|
6
|
|
|
$
|
271,651
|
|
|
$
|
77,788
|
|
________________
|
|
(1)
|
Represents embedded derivatives, all related to the Company’s fixed indexed annuity products, reported in Other policyholder funds in the Company’s Consolidated Balance Sheets.
|
|
|
(2)
|
Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.
|
|
|
(3)
|
Transfers into and out of Level 3 during the
three and six
month periods ended
June 30, 2018
were attributable to changes in the availability of observable market information for individual fixed maturity securities . The Company’s policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.
|
For the
six
month period ended
June 30, 2019
, the Company had no net losses on Level 3 securities. For the
six
month period ended
June 30, 2018
, the Company had a realized net loss on two Level 3 securities of
$243 thousand
. For the
three and six
month periods ended
June 30, 2019
, net investment losses of
$371 thousand
and
$4,705 thousand
were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held; for the
three and six
month periods ended
June 30, 2018
, the respective gain amounts were
$1,291 thousand
and
$3,513 thousand
.
Note 4 - Fair Value of Financial Instruments (Continued)
The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets and liabilities classified as Level 3 are subject to the control processes as described in Note 3 in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.
The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally relate to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.
Financial Instruments Not Carried at Fair Value; Disclosure Required
The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
|
|
Fair Value Measurements at
|
|
|
Carrying
|
|
Fair
|
|
Reporting Date Using
|
|
|
Amount
|
|
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
161,313
|
|
|
$
|
166,023
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
166,023
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy reserves,
fixed annuity contracts
|
|
4,605,272
|
|
|
4,529,317
|
|
|
—
|
|
|
—
|
|
|
4,529,317
|
|
Investment contract and life policy reserves,
account values on life contracts
|
|
90,239
|
|
|
93,366
|
|
|
—
|
|
|
—
|
|
|
93,366
|
|
Other policyholder funds
|
|
735,919
|
|
|
735,919
|
|
|
—
|
|
|
676,460
|
|
|
59,459
|
|
Long-term debt
|
|
297,881
|
|
|
315,938
|
|
|
—
|
|
|
315,938
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Financial Assets
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
|
|
|
|
|
|
|
|
Other investments
|
|
$
|
156,725
|
|
|
$
|
161,449
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
161,449
|
|
Financial Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contract and life policy reserves,
fixed annuity contracts
|
|
4,555,849
|
|
|
4,478,338
|
|
|
—
|
|
|
—
|
|
|
4,478,338
|
|
Investment contract and life policy reserves,
account values on life contracts
|
|
87,229
|
|
|
90,402
|
|
|
—
|
|
|
—
|
|
|
90,402
|
|
Other policyholder funds
|
|
689,287
|
|
|
689,287
|
|
|
—
|
|
|
626,325
|
|
|
62,962
|
|
Long-term debt
|
|
297,740
|
|
|
291,938
|
|
|
—
|
|
|
291,938
|
|
|
—
|
|
Note 5 - Derivative Instruments
The Company offers fixed indexed annuity (FIA) products, which are deferred fixed annuities that guarantee the return of principal to the contractholder and credit interest based on a percentage of the gain in a specified market index. The Company also offers indexed universal life (IUL) products which credit interest based on a percentage of the gain in a specified market index. When deposits are received for FIA and IUL contracts, a portion is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to FIA and IUL policyholders. For the Company, substantially all such call options are one-year options purchased to match the funding requirements of the underlying contracts. The call options are carried at fair value with changes in fair value included in Net investment gains (losses), a component of revenues, in the Consolidated Statements of Operations.
The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open positions. Call options are not purchased to fund the index liabilities which may arise after the next deposit anniversary date. On the respective anniversary dates of the indexed deposits, the index used to compute the annual index credit is reset and new one-year call options are purchased to fund the next annual index credit. The cost of these purchases is managed through the terms of the FIA and IUL contracts, which permit changes to index return caps, participation rates and/or asset fees, subject to guaranteed minimums on each contract’s anniversary date. By adjusting the index return caps, participation rates or asset fees, crediting rates generally can be managed except in cases where the contractual features would prevent further modifications.
The future annual index credits on FIA are accounted for as a "series of embedded derivatives" over the expected life of the applicable contract with a corresponding reserve recorded. For IUL, the embedded derivative represents a single year liability for the index return.
The Company carries all derivative instruments at fair value in the Consolidated Balance Sheets. The Company elected to not use hedge accounting for derivative transactions related to the FIA and IUL products. As a result, the Company recognizes the purchased call options and the embedded derivatives related to the provision of a contingent return at fair value, with changes in the fair value recognized immediately as Net investment gains (losses) in the Consolidated Statements of Operations. The fair values of derivative instruments, including derivative instruments embedded in FIA and IUL contracts, are presented in the Consolidated Balance Sheets as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
|
Derivative instruments, included in Short-term and other investments
|
|
$
|
8,753
|
|
|
$
|
2,647
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
FIA - embedded derivatives, included in Other policyholder funds
|
|
$
|
85,961
|
|
|
$
|
78,700
|
|
IUL - embedded derivatives, included in
Investment contract and life policy reserves
|
|
940
|
|
|
248
|
|
Note 5 - Derivative Instruments (Continued)
In general, the change in the fair value of the embedded derivatives related to FIA will not correspond to the change in fair value of the purchased call options because the purchased call options are one-year options while the options valued in the embedded derivatives represent the rights of the policyholder to receive index credits over the entire period the FIA contracts are expected to be in force, which typically exceeds
10
years. The changes in fair value of derivatives included in the Consolidated Statements of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in fair value of derivatives:
(1)
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
$
|
1,375
|
|
|
$
|
(2
|
)
|
|
$
|
5,429
|
|
|
$
|
(851
|
)
|
|
|
|
|
|
|
|
|
|
Change in fair value of embedded derivatives:
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Net investment gains (losses)
|
|
$
|
(516
|
)
|
|
$
|
1,281
|
|
|
$
|
(5,261
|
)
|
|
$
|
3,569
|
|
________________
|
|
(1)
|
Includes the gains or losses recognized at the expiration of the option term or early termination and the changes in fair value for open options.
|
The Company’s strategy attempts to mitigate potential risk of loss under these agreements through a regular monitoring process, which evaluates the program’s effectiveness. The Company is exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, option contracts are purchased from multiple counterparties, which are evaluated for creditworthiness prior to purchase of the contracts. All of these options have been purchased from nationally recognized financial institutions with a Standard and Poor’s Global Inc. (S&P)/Moody's Investors Service, Inc. (Moody's) long-term credit rating of "BBB+/A1" or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. The Company also obtains credit support agreements that allow it to request the counterparty to provide collateral when the fair value of the exposure to the counterparty exceeds specified amounts.
The notional amount and fair value of call options by counterparty and each counterparty’s long-term credit ratings were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2019
|
|
December 31, 2018
|
|
|
Credit Rating
|
|
Notional
|
|
Fair
|
|
Notional
|
|
Fair
|
Counterparty
|
|
S&P
|
|
Moody's
|
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Bank of America, N.A.
|
|
A+
|
|
Aa2
|
|
$
|
156,800
|
|
|
$
|
3,560
|
|
|
$
|
144,500
|
|
|
$
|
870
|
|
Barclays Bank PLC
|
|
A
|
|
A2
|
|
72,500
|
|
|
1,696
|
|
|
28,500
|
|
|
247
|
|
Citigroup Inc.
|
|
BBB+
|
|
A3
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Credit Suisse International
|
|
A+
|
|
A1
|
|
16,100
|
|
|
295
|
|
|
16,100
|
|
|
55
|
|
Societe Generale
|
|
A
|
|
|
|
55,000
|
|
|
3,202
|
|
|
89,100
|
|
|
1,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
300,400
|
|
|
$
|
8,753
|
|
|
$
|
278,200
|
|
|
$
|
2,647
|
|
As of
June 30, 2019
and
December 31, 2018
, the Company held
$8,663 thousand
and
$1,868 thousand
, respectively, of cash received from counterparties for derivative collateral, which is included in Other liabilities on the Consolidated Balance Sheets. This derivative collateral limits the Company’s maximum amount of economic loss due to credit risk that would be incurred if parties to the call options failed completely to perform according to the terms of the contracts to
$250 thousand
per counterparty.
Note 6 - Deposit Asset on Reinsurance
In the second quarter of 2019, the Company reinsured a
$2.9 billion
block of in force fixed and variable annuity business with a minimum crediting rate of
4.5%
. This represented approximately
50%
of the Company’s in force fixed annuity account balances. The arrangement contains investment guidelines and a trust to help meet the Company’s risk management objectives.
The annuity reinsurance transaction was effective April 1, 2019. Under the agreement, approximately
$2.2 billion
of fixed annuity reserves were reinsured on a coinsurance basis for consideration of approximately
$2.3 billion
which resulted in recognition of an after tax realized investment gain of
$106.9 million
. The separate account assets and liabilities of approximately
$0.7 billion
were reinsured on a modified coinsurance basis and thus, remain on the Company’s consolidated financial statements, but the related results of operations are fully reinsured.
The Company determined that the reinsurance agreement does not expose the reinsurer to a reasonable possibility of a significant loss from insurance risk. Therefore, the Company recognizes the reinsurance agreement using the deposit method of accounting. The assets transferred to the reinsurer as consideration paid is reported as a Deposit asset on reinsurance. As amounts are received or paid, consistent with the underlying reinsured contracts, the Deposit asset on reinsurance is adjusted. The Deposit asset on reinsurance is accreted to the estimated ultimate cash flows using the interest method and the adjustment is reported as Net investment income.
Note 7 - Property and Casualty Unpaid Claims and Claim Expenses
The following table is a summary reconciliation of the beginning and ending Property and Casualty unpaid claims and claim expense reserves for the periods indicated. The table presents reserves on both gross and net (after reinsurance) bases. The total net Property and Casualty insurance claims and claim expense incurred amounts are reflected in the Consolidated Statements of Operations. The end of the period gross reserve (before reinsurance) balances and the reinsurance recoverable balances are reflected on a gross basis in the Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Property and Casualty
|
|
|
|
|
|
|
|
|
|
|
Beginning gross reserves
(1)
|
|
$
|
359,701
|
|
|
$
|
331,255
|
|
|
$
|
367,180
|
|
|
$
|
319,182
|
|
Less: reinsurance recoverables
|
|
78,328
|
|
|
62,917
|
|
|
89,725
|
|
|
57,409
|
|
Net reserves, beginning of period
(2)
|
|
281,373
|
|
|
268,338
|
|
|
277,455
|
|
|
261,773
|
|
Incurred claims and claim expenses:
|
|
|
|
|
|
|
|
|
|
|
Claims occurring in the current period
|
|
134,411
|
|
|
147,005
|
|
|
253,178
|
|
|
267,993
|
|
Decrease in estimated reserves for claims occurring
in prior periods
(3)
|
|
(2,000
|
)
|
|
—
|
|
|
(4,000
|
)
|
|
(300
|
)
|
Total claims and claim expenses incurred
(4)
|
|
132,411
|
|
|
147,005
|
|
|
249,178
|
|
|
267,693
|
|
Claims and claim expense payments
for claims occurring during:
|
|
|
|
|
|
|
|
|
|
|
Current period
|
|
83,755
|
|
|
80,403
|
|
|
129,469
|
|
|
127,451
|
|
Prior periods
|
|
39,512
|
|
|
45,006
|
|
|
106,647
|
|
|
112,081
|
|
Total claims and claim expense payments
|
|
123,267
|
|
|
125,409
|
|
|
236,116
|
|
|
239,532
|
|
Net reserves, end of period
(2)
|
|
290,517
|
|
|
289,934
|
|
|
290,517
|
|
|
289,934
|
|
Plus: reinsurance recoverables
|
|
77,345
|
|
|
62,883
|
|
|
77,345
|
|
|
62,883
|
|
Ending gross reserves
(1)
|
|
$
|
367,862
|
|
|
$
|
352,817
|
|
|
$
|
367,862
|
|
|
$
|
352,817
|
|
________________
|
|
(1)
|
Unpaid claims and claim expenses as reported in the Consolidated Balance Sheets also include reserves for Life and Retirement of
$30,477 thousand
and
$27,016 thousand
as of
June 30, 2019
and
2018
, respectively, in addition to Property and Casualty reserves.
|
|
|
(2)
|
Reserves net of anticipated reinsurance recoverables.
|
|
|
(3)
|
Shows the amounts by which the Company decreased its reserves in each of the periods indicated for claims occurring in previous periods to reflect subsequent information on such claims and changes in their projected final settlement costs.
|
|
|
(4)
|
Benefits, claims and settlement expenses as reported in the Consolidated Statements of Operations also include amounts for Life and Retirement of
$20,281 thousand
and
$42,898 thousand
for the
three and six
month periods ended
June 30, 2019
, respectively, in addition to Property and Casualty amounts. Benefits, claims and settlement expenses for Life and Retirement were
$21,273 thousand
and
$44,147 thousand
for the three and six month periods ended
June 30, 2018
, respectively.
|
Net favorable development of total reserves for Property and Casualty claims occurring in prior years was
$4.0 million
and
$0.3 million
for the
six
month periods ended
June 30, 2019
and
2018
, respectively. The favorable development for the
six
month period ended
June 30, 2019
was the result of favorable loss trends in auto and homeowners loss emergence for accident years 2018 and prior. The favorable development for the
six
month period ended
June 30, 2018
was predominately the result of favorable loss trends in homeowners emergence for accident years 2017 and prior.
Indebtedness outstanding was as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2019
|
|
December 31, 2018
|
Short-term debt:
|
|
|
|
|
|
|
Bank Credit Facility, expires June 21, 2024
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
|
|
4.50% Senior Notes, due December 1, 2025. Aggregate principal amount of $250,000 thousand less unaccrued discount of $458 and $488 thousand (4.5% imputed rate) and unamortized debt issuance costs of $1,661 thousand and $1,772 thousand
|
|
247,881
|
|
|
247,740
|
|
FHLB borrowing
|
|
50,000
|
|
|
50,000
|
|
Total
|
|
$
|
297,881
|
|
|
$
|
297,740
|
|
The
4.50%
Senior Notes due 2025 (Senior Notes due 2025) and the FHLB borrowing are described in Note 7 of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
Credit Agreement with Financial Institutions (Bank Credit Facility
)
On June 21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit Agreement (Bank Credit Facility). The new Bank Credit Facility increased the amount available on this senior revolving credit facility to
$225 million
from
$150 million
. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served as joint leads on the new agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus
115
basis points.
On July 1, 2019, the Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. As of August 1, 2019, the amount outstanding on the senior revolving credit facility was
$135 million
. The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was
0.15%
on an annual basis at
June 30, 2019
.
The Company recognizes the cost of reinsurance premiums over the contract periods for such premiums in proportion to the insurance protection provided. Amounts recoverable from reinsurers for unpaid claims and claim settlement expenses, including estimated amounts for unsettled claims, claims incurred but not yet reported and policy benefits, are estimated in a manner consistent with the insurance liability associated with the policy. The effects of reinsurance on premiums written and contract deposits; premiums and contract charges earned; and benefits, claims and settlement expenses were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Gross
Amount
|
|
Ceded to
Other
Companies
(1)
|
|
Assumed
from Other
Companies
|
|
Net
Amount
|
Three months ended June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
(2)
|
|
$
|
314,897
|
|
|
$
|
6,028
|
|
|
$
|
2,822
|
|
|
$
|
311,691
|
|
Premiums and contract charges earned
|
|
213,415
|
|
|
8,155
|
|
|
2,836
|
|
|
208,096
|
|
Benefits, claims and settlement expenses
|
|
153,436
|
|
|
2,797
|
|
|
2,053
|
|
|
152,692
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
(2)
|
|
$
|
305,864
|
|
|
$
|
5,483
|
|
|
$
|
1,341
|
|
|
$
|
301,722
|
|
Premiums and contract charges earned
|
|
209,892
|
|
|
5,505
|
|
|
1,223
|
|
|
205,610
|
|
Benefits, claims and settlement expenses
|
|
170,459
|
|
|
3,330
|
|
|
1,149
|
|
|
168,278
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2019
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
(2)
|
|
$
|
613,990
|
|
|
$
|
11,876
|
|
|
$
|
4,971
|
|
|
$
|
607,085
|
|
Premiums and contract charges earned
|
|
426,671
|
|
|
13,977
|
|
|
5,187
|
|
|
417,881
|
|
Benefits, claims and settlement expenses
|
|
295,488
|
|
|
7,089
|
|
|
3,677
|
|
|
292,076
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2018
|
|
|
|
|
|
|
|
|
Premiums written and contract deposits
(2)
|
|
$
|
594,680
|
|
|
$
|
10,997
|
|
|
$
|
2,047
|
|
|
$
|
585,730
|
|
Premiums and contract charges earned
|
|
417,629
|
|
|
11,033
|
|
|
2,012
|
|
|
408,608
|
|
Benefits, claims and settlement expenses
|
|
322,427
|
|
|
12,344
|
|
|
1,757
|
|
|
311,840
|
|
________________
|
|
(1)
|
Excludes the annuity reinsurance agreement accounted for under the deposit method that is discussed in Note 6.
|
|
|
(2)
|
This measure is not based on accounting principles generally accepted in the U.S. (non-GAAP). An explanation of this non-GAAP measure is contained in the Glossary of Selected Terms included as an exhibit in the Company's reports filed with the SEC.
|
Note 10 - Commitments
Investment Commitments
From time to time, the Company has outstanding commitments to purchase investments and/or commitments to lend funds under bridge loans. Unfunded commitments to purchase investments were
$157.4 million
and
$145.4 million
at
June 30, 2019
and
December 31, 2018
, respectively.
Note 11 - Segment Information
The Company conducts and manages its business through
four
segments. The
three
operating segments, representing the major lines of insurance business, are: Property and Casualty, primarily personal lines automobile and property insurance products; Retirement, primarily tax-qualified fixed and variable annuities; and Life, life insurance. The Company does not allocate the impact of corporate-level transactions to these operating segments, consistent with the basis for management’s evaluation of the results of those segments, but classifies those items in the fourth segment, Corporate and Other. In addition to ongoing transactions such as corporate debt service, net investment gains (losses) and certain public company expenses, such items also have included corporate debt retirement costs, when applicable. Summarized financial information for these segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Insurance premiums and contract charges earned
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
171,303
|
|
|
$
|
167,333
|
|
|
$
|
342,143
|
|
|
$
|
332,791
|
|
Retirement
|
|
6,931
|
|
|
7,825
|
|
|
15,509
|
|
|
15,893
|
|
Life
|
|
29,862
|
|
|
30,452
|
|
|
60,229
|
|
|
59,924
|
|
Total
|
|
$
|
208,096
|
|
|
$
|
205,610
|
|
|
$
|
417,881
|
|
|
$
|
408,608
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
12,643
|
|
|
$
|
10,300
|
|
|
$
|
22,861
|
|
|
$
|
19,816
|
|
Retirement
|
|
62,684
|
|
|
67,787
|
|
|
127,423
|
|
|
131,956
|
|
Life
|
|
18,324
|
|
|
19,166
|
|
|
36,376
|
|
|
37,506
|
|
Corporate and Other
|
|
(14
|
)
|
|
42
|
|
|
(37
|
)
|
|
78
|
|
Intersegment eliminations
|
|
(179
|
)
|
|
(194
|
)
|
|
(365
|
)
|
|
(391
|
)
|
Total
|
|
$
|
93,458
|
|
|
$
|
97,101
|
|
|
$
|
186,258
|
|
|
$
|
188,965
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
Property and Casualty
|
|
$
|
5,101
|
|
|
$
|
(10,896
|
)
|
|
$
|
20,153
|
|
|
$
|
(1,174
|
)
|
Retirement
|
|
(25,045
|
)
|
|
14,141
|
|
|
(12,894
|
)
|
|
25,562
|
|
Life
|
|
5,239
|
|
|
5,879
|
|
|
8,516
|
|
|
9,666
|
|
Corporate and Other
|
|
108,527
|
|
|
(3,207
|
)
|
|
110,213
|
|
|
(7,982
|
)
|
Total
|
|
$
|
93,822
|
|
|
$
|
5,917
|
|
|
$
|
125,988
|
|
|
$
|
26,072
|
|
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
June 30, 2019
|
|
December 31, 2018
|
Assets
|
|
|
|
|
Property and Casualty
|
|
$
|
1,281,344
|
|
|
$
|
1,236,362
|
|
Retirement
|
|
8,493,089
|
|
|
7,866,969
|
|
Life
|
|
1,911,569
|
|
|
1,821,351
|
|
Corporate and Other
|
|
145,022
|
|
|
149,014
|
|
Intersegment eliminations
|
|
(51,617
|
)
|
|
(41,800
|
)
|
Total
|
|
$
|
11,779,407
|
|
|
$
|
11,031,896
|
|
Note 12 - Operating Leases
The Company has various operating lease agreements, primarily for real estate (claims and marketing offices in a few states) as well as for computer equipment and copier machines. Such leases have remaining lease terms of
1
years to
6
years, some of which may include options to extend the leases for up to
10
years.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
Operating lease cost
|
|
$
|
791
|
|
|
$
|
1,600
|
|
Short-term lease cost
|
|
27
|
|
|
51
|
|
Total lease cost
|
|
$
|
818
|
|
|
$
|
1,651
|
|
Supplemental cash flow information related to operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
($ in thousands)
|
|
Three Months Ended
June 30, 2019
|
|
Six Months Ended
June 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
575
|
|
|
$
|
1,341
|
|
Supplemental balance sheet information related to operating leases was as follows:
|
|
|
|
|
|
($ in thousands, except lease term and discount rate)
|
|
June 30, 2019
|
Assets
|
|
|
Right of use assets, included in Other assets
|
|
$
|
12,692
|
|
|
|
|
Liabilities
|
|
|
Operating lease liabilities, included in Other liabilities
|
|
$
|
13,429
|
|
|
|
|
Weighted Average Remaining Lease Term
|
|
5.00
|
|
|
|
|
Weighted Average Discount Rate
|
|
4.10
|
%
|
Future minimum lease payments under non-cancellable operating leases as of
June 30, 2019
were as follows:
|
|
|
|
|
|
($ in thousands)
|
|
|
Year Ending December 31,
|
|
|
2019 (excluding the six months ended June 30, 2019)
|
|
$
|
1,448
|
|
2020
|
|
3,108
|
|
2021
|
|
3,028
|
|
2022
|
|
2,943
|
|
2023
|
|
2,246
|
|
Thereafter
|
|
2,111
|
|
Total future minimum lease payments
|
|
14,884
|
|
Less imputed interest
|
|
(1,455
|
)
|
Total
|
|
$
|
13,429
|
|
As of
June 30, 2019
, the Company has no additional operating leases that have not yet commenced.
Note 13 - Supplemental Cash Flow Information
Non-cash investing activities include
$2.1 billion
of investments and policy loans transferred to a reinsurer as consideration paid during the second quarter of 2019 in connection with the Company’s reinsurance of a
$2.9 billion
block of in force fixed and variable annuity business. See Note 6 for further information.
Non-cash investing activities in respect to modifications or exchanges of fixed maturity securities was insignificant for the six months ended June 30, 2019 and 2018, respectively.
Note 14 - Goodwill
The Company conducts impairment testing for goodwill at least annually, or more often if events, changes or circumstances indicate that the carrying amount may not be recoverable. See Note 1 in the Company's Annual Report on Form 10-K for the year ended 2018 for further description of impairment testing.
The annuity reinsurance transaction described in Note 6 triggered the requirement to evaluate the goodwill associated with the annuity business of the Retirement segment. For the evaluation, the fair value of the Retirement segment was measured using a discounted cash flow method. The carrying value exceeded the fair value, resulting in a
$28,025 thousand
non-cash impairment charge during the quarter ended June 30, 2019 which represented the entire balance of the goodwill associated with the annuity business of the Retirement segment. The impairment charge was reported as Other expense in the Consolidated Statement of Operations.
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Three Months Ended
June 30,
|
|
2019-2018
|
|
Six Months Ended
June 30,
|
|
2019-2018
|
|
|
2019
|
|
2018
|
|
Change %
|
|
2019
|
|
2018
|
|
Change %
|
Insurance premiums and
contract charges earned
|
|
$
|
208.1
|
|
|
$
|
205.6
|
|
|
1.2
|
%
|
|
$
|
417.9
|
|
|
$
|
408.6
|
|
|
2.3
|
%
|
Net investment income
|
|
93.5
|
|
|
97.1
|
|
|
-3.7
|
%
|
|
186.3
|
|
|
189.0
|
|
|
-1.4
|
%
|
Net investment gains (losses)
|
|
146.3
|
|
|
0.7
|
|
|
N.M.
|
|
153.7
|
|
|
(1.0
|
)
|
|
N.M.
|
Other income
|
|
3.6
|
|
|
2.8
|
|
|
28.6
|
%
|
|
6.8
|
|
|
5.1
|
|
|
33.3
|
%
|
Total revenues
|
|
451.5
|
|
|
306.2
|
|
|
47.5
|
%
|
|
764.7
|
|
|
601.7
|
|
|
27.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement expenses
|
|
152.7
|
|
|
168.3
|
|
|
-9.3
|
%
|
|
292.1
|
|
|
311.9
|
|
|
-6.3
|
%
|
Interest credited
|
|
53.6
|
|
|
51.1
|
|
|
4.9
|
%
|
|
106.5
|
|
|
101.1
|
|
|
5.3
|
%
|
DAC amortization expense
|
|
31.6
|
|
|
26.5
|
|
|
19.2
|
%
|
|
56.6
|
|
|
53.2
|
|
|
6.4
|
%
|
Operating expenses
|
|
55.3
|
|
|
50.2
|
|
|
10.2
|
%
|
|
109.3
|
|
|
98.4
|
|
|
11.1
|
%
|
Interest expense
|
|
3.3
|
|
|
3.3
|
|
|
—
|
%
|
|
6.6
|
|
|
6.5
|
|
|
1.5
|
%
|
Other expense
|
|
28.0
|
|
|
—
|
|
|
N.M.
|
|
28.0
|
|
|
—
|
|
|
N.M.
|
Total benefits, losses and expenses
|
|
324.5
|
|
|
299.4
|
|
|
8.4
|
%
|
|
599.1
|
|
|
571.1
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
127.0
|
|
|
6.8
|
|
|
N.M.
|
|
165.6
|
|
|
30.6
|
|
|
N.M.
|
Income tax expense
|
|
33.2
|
|
|
0.9
|
|
|
N.M.
|
|
39.6
|
|
|
4.5
|
|
|
N.M.
|
Net income
|
|
$
|
93.8
|
|
|
$
|
5.9
|
|
|
N.M.
|
|
$
|
126.0
|
|
|
$
|
26.1
|
|
|
N.M.
|
___________________
N.M. - Not meaningful.
Insurance Premiums and Contract Charges Earned
For the three and six month periods ended
June 30, 2019
, insurance premiums and contract charges earned increased $2.5 million and $9.3 million, respectively, compared to the prior year periods, primarily due to increases in average premium per policy for both automobile and property.
Net Investment Income
Excluding accreted net investment income on the deposit asset on reinsurance, net investment income for the three and six month periods ended June 30, 2019 declined primarily because invested assets decreased 22.2% from December 31, 2018 due to assets transferred under the annuity reinsurance transaction as well as lower than expected new money rates and prepayments that were partially offset by stronger returns on alternative investments. Investment yields continue to be impacted by the low interest rate environment of recent years. Annualized investment portfolio yield is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Pretax yield
|
|
5.1%
|
|
5.3%
|
|
5.1%
|
|
5.1%
|
After tax yield
|
|
4.1%
|
|
4.2%
|
|
4.1%
|
|
4.1%
|
During the
six
month period ended
June 30, 2019
, management continued to identify and purchase investments, including a modest level of alternative investments, with attractive risk-adjusted yields relative to market conditions without venturing into asset classes or individual securities that would be inconsistent with the Company's overall conservative investment guidelines.
Net Investment Gains (Losses) - Pretax
For the three and six month periods ended
June 30, 2019
, net investment gains increased $145.6 million and $154.7 million, respectively, compared to the prior year periods as a result of a realized investment gain of $135.3 million recognized during the three month period ended June 30, 2019 in connection with the transfer of investments related to the aforementioned annuity reinsurance transaction. The breakdown of net investment gains (losses) by transaction type is shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
OTTI losses recognized in earnings
|
|
$
|
—
|
|
|
$
|
(1.2
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(1.3
|
)
|
Sales and other, net
|
|
142.1
|
|
|
1.8
|
|
|
146.9
|
|
|
4.0
|
|
Change in fair value - equity securities
|
|
3.4
|
|
|
(1.2
|
)
|
|
6.9
|
|
|
(6.4
|
)
|
Change in fair value and gains (losses) realized
on settlements - derivative instruments
|
|
0.8
|
|
|
1.3
|
|
|
0.2
|
|
|
2.7
|
|
Net investment gains (losses)
|
|
$
|
146.3
|
|
|
$
|
0.7
|
|
|
$
|
153.7
|
|
|
$
|
(1.0
|
)
|
The Company, from time to time, sells securities subsequent to the reporting date that were considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company's intent to sell an invested asset.
Other Income
For the three and six month periods ended
June 30, 2019
, other income increased compared to the prior year periods primarily due to inclusion of BCG brokerage fees.
Benefits, Claims and Settlement Expenses
For the three and six month periods ended
June 30, 2019
, benefits, claims and settlement expenses decreased $15.6 million and $19.8 million, respectively, compared to the prior year periods, driven by improved automobile and property loss ratios.
Interest Credited
For the three and six month periods ended
June 30, 2019
, the increase in Retirement interest credited reflected higher interest costs on Federal Home Loan Bank (FHLB) funding agreements as well as a 2.3% increase in average accumulated fixed deposits. Under the deposit method of accounting, the interest credited on the annuity reinsured block continues to be reported. The average deferred annuity credited rate was 2.5% at June 30, 2019, excluding the reinsured block, and 3.6% at June 30, 2018.
DAC Amortization Expense
For the three month period ended
June 30, 2019
, DAC amortization expense increased $5.1 million compared to the prior year period due to $5.1 million of accelerated amortization of the DAC asset associated with the reinsured annuity block. For the six month period ended
June 30, 2019
, DAC amortization increased $3.4 million compared to the prior year period due to the aforementioned DAC accelerated amortization partially offset by $3.2 million of favorable DAC unlocking in Retirement due to market performance. For Life, DAC unlocking resulted in an immaterial change to amortization for the
three and six
month periods ended
June 30, 2019
.
Operating Expenses
For the three and six month periods ended
June 30, 2019
, increases in operating expenses were consistent with management's expectations as the current periods include $2.8 million and $5.6 million, respectively, of expenses pertaining to BCG and the prior year periods benefited from a $2.2 million legal expense recovery.
The Property and Casualty expense ratio of
26.9%
for the
six
month period ended
June 30, 2019
was
0.5
points above the prior year period primarily due to the legal expense recovery noted above.
Interest Expense
For the
three and six
month periods ended
June 30, 2019
, interest expense was comparable to
June 30, 2018
.
Other Expense
For the three and six month periods ended June 30, 2019, other expense represents the aforementioned goodwill impairment in Retirement.
Income Tax Expense
The effective income tax rate on the Company's pretax income, including net investment gains (losses), was 23.9% and 15.0% for the
six
month periods ended
June 30, 2019
and
2018
, respectively. Income from investments in tax-advantaged securities reduced the effective income tax rates by 1.4 and 4.8 percentage points for the
six
month periods ended
June 30, 2019
and
2018
, respectively. The goodwill impairment charge in the Retirement segment increased the effective income tax rate by 3.5 percentage points at June 30, 2019.
The Company records liabilities for uncertain tax filing positions where it is more likely than not that the position will not be sustainable upon audit by taxing authorities. These liabilities are reevaluated routinely and are adjusted appropriately based on changes in facts or law. The Company has no unrecorded liabilities from uncertain tax filing positions.
At
June 30, 2019
, the Company's federal income tax returns for years prior to 2014 are no longer subject to examination by the IRS. Management does not anticipate any assessments for tax years that remain subject to examination to have a material effect on the Company's financial position or results of operations.
Outlook for
2019
At the time of this Quarterly Report on Form 10-Q, management estimates that 2019 full year core earnings* will be within a range of $2.05 to $2.25 per diluted share, generating a core return on equity* of between 7.0% and 7.5%. This projection also reflects an overall effective tax rate of between 16% and 18%.
Within Property and Casualty, planned premium rate increases, as well as continued underwriting initiatives, are expected to improve the underlying automobile loss ratio* by about 3.0 to 3.5 points and the underlying property loss ratio* by around 3 points. For 2019, management increased the estimate used for catastrophe costs by 20% to be between $45 million and $55 million or 7.0 to 7.5 points. The expense ratio is expected to be consistent with 2018 and is expected to remain around 27%.
Net income for Retirement will decrease as a result of the recent annuity reinsurance transaction and redeployment of capital to the new Supplemental segment. Net investment income for Retirement will decline due to the lower investment levels and the new money rates are anticipated to remain below the average portfolio earned rate. In addition, expense levels will rise over prior year, offset by increases in fee income and other income due to the inclusion of BCG. As a result, net income for Retirement is anticipated to be in the range of $25 million to $27 million for the full year 2019.
Life net income is anticipated to decline 15% over prior year due to the decrease in net investment income noted above accompanied by a modest increase in mortality costs.
Net income for the new Supplemental segment is anticipated to be in the range of $12 million to $14 million for the second half of 2019, partially offset by additional interest expense of $2 million in Corporate and Other.
As described in Critical Accounting Estimates, certain of the Company's significant accounting measurements require the use of estimates and assumptions. As additional information becomes available, adjustments may be required. Those adjustments are charged or credited to income for the period in which the adjustments are made and may impact actual results compared to management's estimates above. Additionally, see Forward-looking Information and Item 1A in this Quarterly Report on Form 10-Q and Items 1 and 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2018 concerning other important factors that could impact actual results. Management believes that a projection of net income is not appropriate on a forward-looking basis because it is not possible to provide a valid forecast of net investment gains (losses), which can vary substantially from one period to another and may have a significant impact on net income.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with GAAP requires the Company's management to make estimates and assumptions based on information available at the time the consolidated financial statements are prepared. These estimates and assumptions affect the reported amounts of the Company's consolidated assets, liabilities, shareholders' equity, net income and cash flows. Certain accounting estimates are particularly sensitive because of their significance to the Company's consolidated financial statements and because of the possibility that subsequent events and available information may differ markedly from management's judgments at the time the consolidated financial statements were prepared. Management has discussed with the Audit Committee the quality, not just the acceptability, of the Company's accounting principles as applied in its financial reporting. The discussions generally included such matters as the consistency of the Company's accounting policies and their application, and the clarity and completeness of the Company's consolidated financial statements, which include related disclosures. For the Company, areas most subject to significant management judgments include:
|
|
•
|
Valuation of fixed maturity securities, including evaluation of other-than-temporary impairments
|
|
|
•
|
Evaluation of goodwill for impairment
|
|
|
•
|
Valuation of life and annuity deferred policy acquisition costs
|
|
|
•
|
Valuation of liabilities for property and casualty unpaid claims and claim expenses
|
|
|
•
|
Valuation of investment contract and life policy reserves
|
Compared to
December 31, 2018
, at
June 30, 2019
, there were no material changes to accounting policies for areas most subject to significant management judgments identified above. In addition to disclosures in the Notes to Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
, discussion of accounting policies, including certain sensitivity information, was presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Critical Accounting Estimates in that Form 10-K.
Results of Operations by Segment
Consolidated financial results primarily reflect the operating results of three operating segments as well as the corporate and other line. These reporting segments are defined based on financial information management uses to evaluate performance and to determine the allocation of assets.
The calculations of segment data are described in more detail in Item 1, Note 14 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The following sections provide analysis and discussion of results of operations for each of the reporting segments as well as investment results.
Property and Casualty
The following table provides certain financial information for the Property and Casualty segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, unless otherwise indicated)
|
|
Three Months Ended
June 30,
|
|
2019-2018
|
|
Six Months Ended
June 30,
|
|
2019-2018
|
|
|
2019
|
|
2018
|
|
Change %
|
|
2019
|
|
2018
|
|
Change %
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums written*:
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
114.6
|
|
|
$
|
114.6
|
|
|
—
|
%
|
|
$
|
231.4
|
|
|
$
|
229.5
|
|
|
0.8
|
%
|
Property and other
|
|
59.7
|
|
|
58.4
|
|
|
2.2
|
%
|
|
104.6
|
|
|
102.9
|
|
|
1.7
|
%
|
Total premiums written
|
|
174.3
|
|
|
173.0
|
|
|
0.8
|
%
|
|
336.0
|
|
|
332.4
|
|
|
1.1
|
%
|
Change in unearned insurance premiums
|
|
(3.0
|
)
|
|
(5.7
|
)
|
|
|
|
|
6.1
|
|
|
0.4
|
|
|
|
Total insurance premiums earned
|
|
171.3
|
|
|
167.3
|
|
|
2.4
|
%
|
|
342.1
|
|
|
332.8
|
|
|
2.8
|
%
|
Incurred claims and claims expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims occurring in the current year
|
|
134.4
|
|
|
147.0
|
|
|
-8.6
|
%
|
|
253.2
|
|
|
268.0
|
|
|
-5.5
|
%
|
Prior years' reserve development
|
|
2.0
|
|
|
—
|
|
|
N.M.
|
|
4.0
|
|
|
0.3
|
|
|
N.M.
|
Total claims and claim expenses incurred
|
|
132.4
|
|
|
147.0
|
|
|
-9.9
|
%
|
|
249.2
|
|
|
267.7
|
|
|
-6.9
|
%
|
Operating expenses,
including DAC amortization
|
|
45.4
|
|
|
44.8
|
|
|
1.3
|
%
|
|
91.9
|
|
|
87.9
|
|
|
4.6
|
%
|
Underwriting gain (loss)
|
|
(6.5
|
)
|
|
(24.5
|
)
|
|
73.5
|
%
|
|
1.0
|
|
|
(22.8
|
)
|
|
104.4
|
%
|
Net investment income
|
|
12.7
|
|
|
10.3
|
|
|
23.3
|
%
|
|
22.9
|
|
|
19.8
|
|
|
15.7
|
%
|
Income (loss) before income taxes
|
|
6.6
|
|
|
(13.7
|
)
|
|
148.2
|
%
|
|
24.4
|
|
|
(2.5
|
)
|
|
N.M.
|
Net income (loss)/core earnings*
|
|
5.1
|
|
|
(10.9
|
)
|
|
146.8
|
%
|
|
20.1
|
|
|
(1.2
|
)
|
|
N.M.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio
|
|
73.8
|
%
|
|
82.0
|
%
|
|
-8.2
|
pts
|
|
72.3
|
%
|
|
79.1
|
%
|
|
-6.8
|
pts
|
Expense ratio
|
|
26.6
|
%
|
|
26.9
|
%
|
|
-0.3
|
pts
|
|
26.9
|
%
|
|
26.3
|
%
|
|
0.6
|
pts
|
Combined ratio:
|
|
100.4
|
%
|
|
108.9
|
%
|
|
-8.5
|
pts
|
|
99.2
|
%
|
|
105.4
|
%
|
|
-6.2
|
pts
|
Prior years' reserve development
|
|
-0.9
|
%
|
|
—
|
%
|
|
-0.9
|
pts
|
|
-0.9
|
%
|
|
—
|
%
|
|
-0.9
|
pts
|
Catastrophes
|
|
1.9
|
%
|
|
3.3
|
%
|
|
-1.4
|
pts
|
|
1.3
|
%
|
|
2.0
|
%
|
|
-0.7
|
pts
|
Underlying combined ratio*
|
|
99.4
|
%
|
|
105.6
|
%
|
|
-6.2
|
pts
|
|
98.8
|
%
|
|
103.4
|
%
|
|
-4.6
|
pts
|
Property
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio
|
|
84.8
|
%
|
|
100.4
|
%
|
|
-15.6
|
pts
|
|
73.9
|
%
|
|
83.3
|
%
|
|
-9.4
|
pts
|
Expense ratio
|
|
26.6
|
%
|
|
26.7
|
%
|
|
-0.1
|
pts
|
|
27.1
|
%
|
|
26.9
|
%
|
|
0.2
|
pts
|
Combined ratio:
|
|
111.4
|
%
|
|
127.1
|
%
|
|
-15.7
|
pts
|
|
101.0
|
%
|
|
110.2
|
%
|
|
-9.2
|
pts
|
Prior years' reserve development
|
|
-1.8
|
%
|
|
—
|
%
|
|
-1.8
|
pts
|
|
-1.9
|
%
|
|
-0.3
|
%
|
|
-1.6
|
pts
|
Catastrophes
|
|
36.8
|
%
|
|
43.3
|
%
|
|
-6.5
|
pts
|
|
27.6
|
%
|
|
30.3
|
%
|
|
-2.7
|
pts
|
Underlying combined ratio*
|
|
76.4
|
%
|
|
83.8
|
%
|
|
-7.4
|
pts
|
|
75.3
|
%
|
|
80.2
|
%
|
|
-4.9
|
pts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policies in force (in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
(1)
|
|
|
|
|
|
|
|
448
|
|
|
471
|
|
|
-4.9
|
%
|
Property
|
|
|
|
|
|
|
|
198
|
|
|
203
|
|
|
-2.5
|
%
|
Total
|
|
|
|
|
|
|
|
646
|
|
|
674
|
|
|
-4.2
|
%
|
___________________
N.M. - Not meaningful.
(1)
June 30, 2019
includes assumed policies in force of 4.
For the three and
six
month periods ended
June 30, 2019
, core earnings* increased $16.0 million and $21.3 million, respectively, compared to the prior year periods. These reflect 7.1 points of improvement in the Property and Casualty combined ratio year to date due to improved underwriting results, lower catastrophe losses and favorable prior years' reserve development.
On a reported basis, the improvement in the automobile combined ratio for the six month period ended June 30, 2019 was mainly attributed to 5.2 points of improvement in the underlying loss ratio* due to rate actions combined with continued stabilization in auto loss trends. The reported property combined ratio improved for the six month period ended June 30, 2019, reflecting an improvement in the underlying loss ratio of 5.1 points as well as a 2.7 point improvement due to lower catastrophe losses.
Rate actions were the primary factor for the slight increase in total premiums written* for the three and
six
month periods ended June 30, 2019 compared to the prior year periods. For
2019
, the Company's full year rate plan anticipates low-single digit average rate increases (including states with no rate actions) for both automobile and property; average approved rate changes during the first
six
months of
2019
were 5.3% for automobile and 4.6% for property.
Automobile premiums written* was comparable to the three and six month periods ended June 30, 2018. In the first
six
months of
2019
, the average written premium per policy and average earned premium per policy increased 5.8% and 6.2%, respectively, compared to the prior year period. For automobile, the number of educator policies has been stable relative to overall automobile policies as educators represented 85.3%, 85.4% and 85.4% of the automobile policies in force as of
June 30, 2019
,
December 31, 2018
and
June 30, 2018
, respectively. Based on policies in force, the automobile 12 month retention rate for new and renewal policies was
81.3%
compared to
82.6%
at
June 30, 2019
and
2018
, respectively, with the decrease due to recent rate and underwriting actions.
Property and other premiums written* increased slightly compared to the three and six month periods ended June 30, 2018. While the number of property policies in force has declined, the average written premium per policy and average earned premium per policy increased 5.2% and 4.3%, respectively, in the first six months of
2019
compared to the prior year period. For property, the number of educator policies has been stable relative to overall property policies as educators represented 82.5%, 82.4% and 82.4% of the property policies in force as of
June 30, 2019
,
December 31, 2018
, and
June 30, 2018
, respectively. The property 12 month new and renewal policy retention rate was
87.7%
and
88.0%
at
June 30, 2019
and
2018
, respectively.
The Company continues to evaluate and implement actions to further mitigate its risk exposure in catastrophe-prone areas of the country. Such actions could include, but are not limited to, non-renewal of property policies, restricted agent geographic placement, limitations on agent new business sales, further tightening of underwriting standards and increased utilization of third-party vendor products.
Retirement
The following table provides certain information for the Retirement segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, unless otherwise indicated)
|
|
Three Months Ended
June 30,
|
|
2019-2018
|
|
Six Months Ended
June 30,
|
|
2019-2018
|
|
|
2019
|
|
2018
|
|
Change %
|
|
2019
|
|
2018
|
|
Change %
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract charges earned
|
|
$
|
6.9
|
|
|
$
|
7.9
|
|
|
-12.7
|
%
|
|
$
|
15.5
|
|
|
$
|
15.9
|
|
|
-2.5
|
%
|
Net investment income
|
|
62.7
|
|
|
67.8
|
|
|
-7.5
|
%
|
|
127.4
|
|
|
132.0
|
|
|
-3.5
|
%
|
Interest credited
|
|
42.3
|
|
|
39.9
|
|
|
6.0
|
%
|
|
84.0
|
|
|
78.6
|
|
|
6.9
|
%
|
Net interest margin without
net investment gains (losses)
|
|
21.5
|
|
|
27.9
|
|
|
-22.9
|
%
|
|
44.5
|
|
|
53.4
|
|
|
-16.7
|
%
|
Net interest margin - Reinsured block
|
|
(1.1
|
)
|
|
—
|
|
|
N.M.
|
|
(1.1
|
)
|
|
—
|
|
|
N.M.
|
Mortality loss and other reserve charges
|
|
1.2
|
|
|
1.4
|
|
|
-14.3
|
%
|
|
1.8
|
|
—
|
|
3.3
|
|
|
-45.5
|
%
|
DAC amortization expense,
excluding unlocking
|
|
4.3
|
|
|
4.8
|
|
|
-10.4
|
%
|
|
9.2
|
|
|
9.6
|
|
|
-4.2
|
%
|
DAC unlocking
|
|
5.6
|
|
|
0.2
|
|
|
N.M.
|
|
3.6
|
|
|
0.4
|
|
|
N.M.
|
Operating expenses
|
|
15.4
|
|
|
13.9
|
|
|
10.8
|
%
|
|
31.3
|
|
|
28.3
|
|
|
10.6
|
%
|
Other expense - goodwill impairment
|
|
28.0
|
|
|
—
|
|
|
N.M.
|
|
28.0
|
|
|
—
|
|
|
N.M.
|
Income (loss) before income taxes
|
|
(24.8
|
)
|
|
17.2
|
|
|
N.M.
|
|
(10.2
|
)
|
|
31.2
|
|
|
-132.7
|
%
|
Net income (loss)
|
|
(25.0
|
)
|
|
14.1
|
|
|
N.M.
|
|
(12.8
|
)
|
|
25.5
|
|
|
N.M.
|
Core earnings*
|
|
3.0
|
|
|
14.1
|
|
|
-78.7
|
%
|
|
15.2
|
|
|
25.5
|
|
|
-40.4
|
%
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity sales deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
|
|
$
|
54.1
|
|
|
$
|
50.7
|
|
|
6.7
|
%
|
|
$
|
102.9
|
|
|
$
|
97.5
|
|
|
5.5
|
%
|
Fixed
|
|
54.9
|
|
|
49.5
|
|
|
10.9
|
%
|
|
113.4
|
|
|
101.5
|
|
|
11.7
|
%
|
Total
|
|
109.0
|
|
|
100.2
|
|
|
8.8
|
%
|
|
216.3
|
|
|
199.0
|
|
|
8.7
|
%
|
Single
|
|
55.8
|
|
|
46.9
|
|
|
19.0
|
%
|
|
111.7
|
|
|
95.5
|
|
|
17.0
|
%
|
Recurring
|
|
53.2
|
|
|
53.3
|
|
|
-0.2
|
%
|
|
104.6
|
|
|
103.5
|
|
|
1.1
|
%
|
Total
|
|
109.0
|
|
|
100.2
|
|
|
8.8
|
%
|
|
216.3
|
|
|
199.0
|
|
|
8.7
|
%
|
Assets under administration (AUA)
|
|
|
|
|
|
|
|
|
|
|
|
|
Annuity assets under management
(1)
|
|
|
|
|
|
|
|
|
4,170.3
|
|
|
6,851.7
|
|
|
-39.1
|
%
|
Broker and advisory assets
under administration
(2)
|
|
|
|
|
|
|
|
|
2,236.0
|
|
|
300.5
|
|
|
N.M.
|
Recordkeeping assets
under administration
(2)
|
|
|
|
|
|
|
|
|
1,395.1
|
|
|
—
|
|
|
N.M.
|
Total
|
|
|
|
|
|
|
|
|
|
|
7,801.4
|
|
|
7,152.2
|
|
|
9.1
|
%
|
Persistency
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable annuities
|
|
|
|
|
|
|
|
|
94.3
|
%
|
|
94.6
|
%
|
|
-0.3
|
pts
|
Fixed annuities
|
|
|
|
|
|
|
|
|
93.9
|
%
|
|
94.4
|
%
|
|
-0.5
|
pts
|
Total
|
|
|
|
|
|
|
|
|
94.0
|
%
|
|
94.5
|
%
|
|
-0.5
|
pts
|
Annuity contracts in force
|
|
|
|
|
|
|
|
|
227
|
|
|
224
|
|
|
1.3
|
%
|
Fixed spread - YTD annualized (basis points)
|
|
|
|
|
|
|
|
|
175
|
|
|
181
|
|
|
-6bps
|
|
___________________
N.M. - Not meaningful.
|
|
(1)
|
Amount reported as of June 30, 2019 excludes $691.6 of assets under management held under modified coinsurance reinsurance.
|
(2)
2019 includes the results of BCG acquired on January 2, 2019.
For the three and
six
month periods ended
June 30, 2019
, core earnings* decreased $11.1 million and $10.3 million, respectively, as compared to the prior year periods reflecting lower net investment income and accelerated amortization of the DAC asset associated with the reinsured block partially offset by favorable benefits expense from mortality. The current periods also include higher operating expenses from the inclusion of BCG.
As a result of the annuity reinsurance transaction, the Company impaired goodwill associated with the annuity business of the Retirement segment and recorded a non-cash impairment charge of $28.0 million during the quarter ended June 30, 2019.
For the three and
six
month periods ended
June 30, 2019
, contract deposits increased compared to the prior year periods, reflecting increases in single deposits. Variable annuity deposits increased by $3.4 million and $5.4 million for the three and six month periods ended June 30, 2019. Fixed annuity deposits increased by $5.4 million and $11.9 million for the current periods.
At
June 30, 2019
, assets under management decreased by $2.7 billion compared to
June 30, 2018
driven by the annuity reinsurance transaction. Variable assets under management, excluding reinsurance, increased by $115.0 million primarily due to market performance. The year to date annualized net interest spread on fixed annuities, excluding reinsurance, decreased 6 basis points.
The Company actively manages its interest rate risk exposure, considering a variety of factors, including earned interest rates, credited interest rates and the relationship between the expected durations of assets and liabilities. Management estimates that over the next 12 months approximately $336.0 million of Retirement and Life combined investment portfolio and related investable cash flows will be reinvested at current market rates. As interest rates remain at low levels, borrowers may prepay or redeem the securities with greater frequency in order to borrow at lower market rates, which could increase investable cash flows and exacerbate the reinvestment risk
.
As a general guideline, for a 100 basis point decline in the average reinvestment rate and based on the Company's existing policies and investment portfolio, the impact from investing in that lower interest rate environment could further reduce Retirement net investment income by approximately $1.3 million in year one and $3.8 million in year two, further reducing the annualized net interest spread by approximately 4 basis points and 13 basis points in the respective periods, compared to the current period annualized net interest spread. The Company could also consider potential changes in rates credited to policyholders, tempered by any restrictions on the ability to adjust policyholder rates due to minimum guaranteed crediting rates.
The expectation for future annualized net interest spreads is also an important component in the amortization of DAC. In terms of the sensitivity of this amortization to the annualized net interest spread, based on DAC as of
June 30, 2019
and assuming all other assumptions are met, a 10 basis point deviation in the current year targeted annualized net interest rate spread assumption would impact amortization between $0.3 million and $0.4 million. This result may change depending on the magnitude and direction of any actual deviations but represents a range of reasonably likely experience for the noted assumption.
The annuity reinsurance agreement entered into in the second quarter of 2019, which reinsured the $2.2 billion block of in force fixed annuities with a minimum crediting rate of 4.5%, mitigates the risk of being able to generate appropriate spreads on the annuity business. Information regarding the interest crediting rates and balances equal to the minimum guaranteed rate for deferred annuity account values excluding the reinsured block is shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
June 30, 2019
|
|
|
|
|
|
|
Deferred Annuities at
|
|
|
Total Deferred Annuities
|
|
Minimum Guaranteed Rate
|
|
|
Percent
of Total
|
|
Accumulated
Value (AV)
|
|
Percent of
Total Deferred
Annuities AV
|
|
Percent
of Total
|
|
Accumulated
Value
|
Minimum guaranteed interest rates:
|
|
|
|
|
|
|
|
|
|
|
Less than 2%
|
|
52.0
|
%
|
|
$
|
1,216.2
|
|
|
46.9
|
%
|
|
34.7
|
%
|
|
$
|
570.9
|
|
Equal to 2% but less than 3%
|
|
12.5
|
%
|
|
293.0
|
|
|
82.8
|
%
|
|
14.8
|
%
|
|
242.7
|
|
Equal to 3% but less than 4%
|
|
26.0
|
%
|
|
607.5
|
|
|
99.9
|
%
|
|
36.9
|
%
|
|
607.0
|
|
Equal to 4% but less than 5%
|
|
7.3
|
%
|
|
171.1
|
|
|
100.0
|
%
|
|
10.4
|
%
|
|
171.1
|
|
5% or higher
|
|
2.2
|
%
|
|
52.0
|
|
|
100.0
|
%
|
|
3.2
|
%
|
|
52.0
|
|
Total
|
|
100.0
|
%
|
|
$
|
2,339.8
|
|
|
70.2
|
%
|
|
100.0
|
%
|
|
$
|
1,643.7
|
|
The Company will continue to be disciplined in executing strategies to mitigate the negative impact on profitability of a sustained low interest rate environment. However, the success of these strategies may be affected by the factors discussed in Item 1A and other factors within this report.
Life
The following table provides certain information for the Life segment for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, unless otherwise indicated)
|
|
Three Months Ended
June 30,
|
|
2019-2018
|
|
Six Months Ended
June 30,
|
|
2019-2018
|
|
|
2019
|
|
2018
|
|
Change %
|
|
2019
|
|
2018
|
|
Change %
|
Financial Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums and contract deposits
|
|
$
|
28.4
|
|
|
$
|
28.5
|
|
|
-0.4
|
%
|
|
$
|
54.8
|
|
|
$
|
54.3
|
|
|
0.9
|
%
|
Insurance premiums and
contract charges earned
|
|
29.9
|
|
|
30.4
|
|
|
-1.6
|
%
|
|
60.3
|
|
|
59.9
|
|
|
0.7
|
%
|
Net investment income
|
|
18.3
|
|
|
19.2
|
|
|
-4.7
|
%
|
|
36.4
|
|
|
37.5
|
|
|
-2.9
|
%
|
Benefits and settlement expenses
|
|
19.1
|
|
|
19.9
|
|
|
-4.0
|
%
|
|
41.1
|
|
|
40.9
|
|
|
0.5
|
%
|
Interest credited
|
|
11.3
|
|
|
11.2
|
|
|
0.9
|
%
|
|
22.5
|
|
|
22.5
|
|
|
—
|
%
|
DAC amortization expense,
excluding unlocking
|
|
2.1
|
|
|
1.9
|
|
|
10.5
|
%
|
|
4.1
|
|
|
3.7
|
|
|
10.8
|
%
|
DAC unlocking
|
|
(0.1
|
)
|
|
—
|
|
|
N.M.
|
|
(0.1
|
)
|
|
0.1
|
|
|
N.M.
|
Operating expenses
|
|
9.2
|
|
|
9.3
|
|
|
-1.1
|
%
|
|
18.6
|
|
|
18.3
|
|
|
1.6
|
%
|
Income before income taxes
|
|
6.7
|
|
|
7.3
|
|
|
-8.2
|
%
|
|
10.7
|
|
|
12.0
|
|
|
-10.8
|
%
|
Net income /core earnings*
|
|
5.2
|
|
|
5.9
|
|
|
-11.9
|
%
|
|
8.5
|
|
|
9.7
|
|
|
-12.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance in force
|
|
|
|
|
|
|
|
$
|
18,598
|
|
|
$
|
17,862
|
|
|
4.1
|
%
|
Number of policies in force (in thousands)
|
|
|
|
|
|
|
|
199
|
|
|
198
|
|
|
0.5
|
%
|
Average face amount in force (in dollars)
|
|
|
|
|
|
|
|
$
|
93,506
|
|
|
$
|
90,282
|
|
|
3.6
|
%
|
Lapse ratio (ordinary life insurance in force)
|
|
|
|
|
|
|
|
4.5
|
%
|
|
4.9
|
%
|
|
-0.4
|
pts
|
Mortality costs
|
|
|
|
|
|
|
|
$
|
18.0
|
|
|
$
|
17.2
|
|
|
4.7
|
%
|
___________________
N.M. - Not meaningful.
For the three and
six
month periods ended
June 30, 2019
, core earnings* decreased compared to the prior year periods, largely due to lower net investment income partially offset by lower mortality costs in the second quarter of 2019.
Life premiums and contract deposits* for the three and
six
month periods ended
June 30, 2019
were comparable to the prior year periods. The ordinary life insurance in force lapse ratio was
4.5%
for the 12 months ended
June 30, 2019
compared to
4.9%
for the 12 month period ended
June 30, 2018
.
Corporate and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Three Months Ended
June 30,
|
|
2019-2018
|
|
Six Months Ended
June 30,
|
|
2019-2018
|
|
|
2019
|
|
2018
|
|
Change %
|
|
2019
|
|
2018
|
|
Change %
|
Interest expense
|
|
$
|
(2.9
|
)
|
|
$
|
(3.0
|
)
|
|
3.3
|
%
|
|
$
|
(5.9
|
)
|
|
$
|
(6.0
|
)
|
|
1.7
|
%
|
Net investment gains (losses) pretax
|
|
146.3
|
|
|
0.7
|
|
|
N.M.
|
|
153.7
|
|
|
(1.0
|
)
|
|
N.M.
|
Tax on net investment gains (losses)
|
|
31.6
|
|
|
0.1
|
|
|
N.M.
|
|
33.2
|
|
|
(0.3
|
)
|
|
N.M.
|
Net investment gains (losses) after tax
|
|
114.7
|
|
|
0.6
|
|
|
N.M.
|
|
120.5
|
|
|
(0.7
|
)
|
|
N.M.
|
Net income (loss)
|
|
108.5
|
|
|
(3.2
|
)
|
|
N.M.
|
|
110.2
|
|
|
(7.9
|
)
|
|
N.M.
|
Core earnings (loss)*
|
|
(6.2
|
)
|
|
(3.8
|
)
|
|
-63.2
|
%
|
|
(10.3
|
)
|
|
(7.2
|
)
|
|
-43.1
|
%
|
___________________
N.M. - Not meaningful.
For the three and
six
month periods ended
June 30, 2019
, core earnings* decreased compared to the prior year periods, driven by $3.1 and $4.0 million, respectively, of pretax acquisition costs associated with BCG and NTA.
Investment Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Three Months Ended
June 30,
|
|
2019-2018
|
|
Six Months Ended
June 30,
|
|
2019-2018
|
|
|
2019
|
|
2018
|
|
Change %
|
|
2019
|
|
2018
|
|
Change %
|
Net investment income - investment portfolio
|
|
$
|
70.3
|
|
|
$
|
97.1
|
|
|
-27.6
|
%
|
|
$
|
163.1
|
|
|
$
|
189.0
|
|
|
-13.7
|
%
|
Investment income - Deposit asset on reinsurance
|
|
23.2
|
|
|
—
|
|
|
N.M.
|
|
23.2
|
|
|
—
|
|
|
N.M.
|
Pretax net investment gains (losses)
|
|
146.3
|
|
|
0.7
|
|
|
N.M.
|
|
153.7
|
|
|
(1.0
|
)
|
|
N.M.
|
Pretax net unrealized investment
gains on fixed maturity securities
|
|
|
|
|
|
|
|
292.5
|
|
|
183.5
|
|
|
59.4
|
%
|
___________________
N.M. - Not meaningful.
For the three and
six
month periods ended
June 30, 2019
, net investment income from the investment portfolio was lower than the prior year periods primarily because invested assets decreased 22.2% from December 31, 2018 due to assets transferred under the annuity reinsurance transaction as well as lower than expected new money rates and prepayments that were somewhat offset by stronger returns on alternative investments.
For the three and
six
month periods ended
June 30, 2019
, pretax net investment gains were driven primarily by a $135.3 million pretax realized investment gain related to the transfer of assets as a result of the annuity reinsurance transaction and the change in fair value of equity securities. Pretax net unrealized investment gains on securities were up
$109.0 million
compared to prior year, reflecting a decline in the 10-year U.S. Treasury yield of 85 basis points and tightening investment-grade credit spreads, offset by the impact of the aforementioned $135.3 million pretax realized investment gain related to the annuity reinsurance transaction.
Fixed Maturity and Equity Securities Portfolios
The table below presents the Company’s fixed maturity and equity securities portfolios by major asset class, including the 10 largest sectors of the Company’s corporate bond holdings (based on fair value).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
June 30, 2019
|
|
|
Number of
Issuers
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Pretax Net
Unrealized
Gain (Loss)
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking & Finance
|
|
96
|
|
|
$
|
358.3
|
|
|
$
|
335.6
|
|
|
$
|
22.7
|
|
Insurance
|
|
36
|
|
|
134.7
|
|
|
120.2
|
|
|
14.5
|
|
Real Estate
|
|
35
|
|
|
105.9
|
|
|
101.4
|
|
|
4.5
|
|
Energy
(1)
|
|
52
|
|
|
103.5
|
|
|
94.9
|
|
|
8.6
|
|
HealthCare, Pharmacy
|
|
43
|
|
|
92.2
|
|
|
86.1
|
|
|
6.1
|
|
Technology
|
|
29
|
|
|
78.8
|
|
|
75.3
|
|
|
3.5
|
|
Transportation
|
|
29
|
|
|
73.2
|
|
|
68.8
|
|
|
4.4
|
|
Utilities
|
|
36
|
|
|
59.3
|
|
|
52.1
|
|
|
7.2
|
|
Food and Beverage
|
|
17
|
|
|
41.7
|
|
|
39.6
|
|
|
2.1
|
|
Telecommunications
|
|
21
|
|
|
40.7
|
|
|
36.4
|
|
|
4.3
|
|
All other corporates
(2)
|
|
158
|
|
|
233.0
|
|
|
216.5
|
|
|
16.5
|
|
Total corporate bonds
|
|
552
|
|
|
1,321.3
|
|
|
1,226.9
|
|
|
94.4
|
|
Mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government and federally sponsored agencies
|
|
216
|
|
|
363.6
|
|
|
338.5
|
|
|
25.1
|
|
Commercial
(3)
|
|
107
|
|
|
340.5
|
|
|
326.6
|
|
|
13.9
|
|
Other
|
|
25
|
|
|
69.9
|
|
|
69.4
|
|
|
0.5
|
|
Municipal bonds
(4)
|
|
493
|
|
|
1,599.7
|
|
|
1,472.9
|
|
|
126.8
|
|
Government bonds
|
|
|
|
|
|
|
|
|
U.S.
|
|
37
|
|
|
566.4
|
|
|
546.4
|
|
|
20.0
|
|
Foreign
|
|
10
|
|
|
47.4
|
|
|
45.3
|
|
|
2.1
|
|
Collateralized loan obligations
(5)
|
|
131
|
|
|
753.2
|
|
|
758.2
|
|
|
(5.0
|
)
|
Asset-backed securities
|
|
94
|
|
|
472.3
|
|
|
457.6
|
|
|
14.7
|
|
Total fixed maturity securities
|
|
1,665
|
|
|
$
|
5,534.3
|
|
|
$
|
5,241.8
|
|
|
$
|
292.5
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-redeemable preferred stocks
|
|
12
|
|
|
$
|
50.5
|
|
|
|
|
|
Common stocks
|
|
91
|
|
|
27.9
|
|
|
|
|
|
Closed-end fund
|
|
1
|
|
|
21.7
|
|
|
|
|
|
Total equity securities
|
|
104
|
|
|
$
|
100.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,769
|
|
|
$
|
5,634.4
|
|
|
|
|
|
________________
|
|
(1)
|
At
June 30, 2019
, the fair value amount included $10.1 million which were non-investment grade.
|
|
|
(2)
|
The All other corporates category contains 19 additional industry sectors. Gaming, broadcasting & media, leisure/entertainment, metal and mining and retail represented $133.3 million of fair value at
June 30, 2019
, with the remaining 14 sectors each representing less than $15.0 million.
|
|
|
(3)
|
At
June 30, 2019
, 100% were investment grade, with an overall credit rating of AA+, and the positions were well diversified by property type, geography and sponsor.
|
|
|
(4)
|
Holdings are geographically diversified, 54.4% are tax-exempt and 77.2% are revenue bonds tied to essential services, such as mass transit, water and sewer. The overall credit quality of the municipal bond portfolio was AA- at
June 30, 2019
.
|
|
|
(5)
|
Based on fair value, 97.7% of the collateralized loan obligation securities were rated investment grade by Standard and Poor’s Global Inc. (S&P), Moody’s Investors Service, Inc. (Moody’s) and/or Fitch Ratings, Inc. (Fitch) at
June 30, 2019
.
|
At
June 30, 2019
, the Company’s diversified fixed maturity securities portfolio consisted of 2,615 investment positions, issued by
1,665
entities, and totaled approximately
$5.5 billion
in fair value. This portfolio was 97.1% investment grade, based on fair value, with an average quality rating of A+. The Company’s investment guidelines target single corporate issuer concentrations to 0.5% of invested assets for AAA or AA rated securities, 0.4% of invested assets for A or BBB rated securities, and 0.2% of invested assets for non-investment grade securities.
The following table presents the composition and fair value of the Company’s fixed maturity and equity securities portfolios by rating category. At
June 30, 2019
, 96.3% of these combined portfolios were investment grade, based on fair value, with an overall average quality rating of A+. The Company has classified the entire fixed maturity securities portfolio as available for sale, which is carried at fair value.
Rating of Fixed Maturity Securities and Equity Securities
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Percent of Portfolio
|
|
|
|
|
|
|
Fair Value
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
June 30, 2019
|
|
Fair
Value
|
|
Amortized
Cost
|
Fixed maturity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
9.1
|
%
|
|
12.3
|
%
|
|
$
|
680.6
|
|
|
$
|
671.1
|
|
AA
(2)
|
|
44.5
|
|
|
43.9
|
|
|
2,429.4
|
|
|
2,296.2
|
|
A
|
|
22.4
|
|
|
22.8
|
|
|
1,260.6
|
|
|
1,171.5
|
|
BBB
|
|
21.2
|
|
|
17.9
|
|
|
996.4
|
|
|
940.7
|
|
BB
|
|
1.8
|
|
|
1.8
|
|
|
98.2
|
|
|
95.8
|
|
B
|
|
0.4
|
|
|
0.4
|
|
|
27.5
|
|
|
27.4
|
|
CCC or lower
|
|
0.1
|
|
|
0.1
|
|
|
0.5
|
|
|
0.5
|
|
Not rated
(3)
|
|
0.5
|
|
|
0.8
|
|
|
41.1
|
|
|
38.6
|
|
Total fixed maturity securities
|
|
100.0
|
%
|
|
100.0
|
%
|
|
$
|
5,534.3
|
|
|
$
|
5,241.8
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
AAA
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
AA
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
A
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
BBB
|
|
49.0
|
%
|
|
50.4
|
%
|
|
$
|
50.5
|
|
|
|
BB
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
B
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
CCC or lower
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Not rated
|
|
51.0
|
|
|
49.6
|
|
|
49.6
|
|
|
|
Total equity securities
|
|
100.0
|
%
|
|
100.0
|
%
|
|
$
|
100.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
$
|
5,634.4
|
|
|
|
________________
|
|
(1)
|
Ratings are as assigned primarily by S&P when available, with remaining ratings as assigned on an equivalent basis by Moody’s or Fitch. Ratings for publicly traded securities are determined when the securities are acquired and are updated monthly to reflect any changes in ratings.
|
|
|
(2)
|
At
June 30, 2019
, the AA rated fair value amount included $566.4 million of U.S. Government and federally sponsored agency securities and $572.2 million of mortgage-backed and asset-backed securities issued by U.S. Government and federally sponsored agencies.
|
|
|
(3)
|
This category primarily represents private placement and municipal securities not rated by either S&P, Moody’s or Fitch.
|
At
June 30, 2019
, the fixed maturity securities portfolio had $13.0 million of pretax gross unrealized investment losses on $884.8 million of fair value related to 299 positions. Of the investment positions with gross unrealized losses, there were three trading below 80.0% of the carrying value at
June 30, 2019
.
The Company views the unrealized investment losses of all of the fixed maturity securities at
June 30, 2019
as temporary. Future changes in circumstances related to these and other securities could require subsequent recognition of OTTI.
Liquidity and Financial Resources
Off-Balance Sheet Arrangements
At
June 30, 2019
and
2018
, the Company did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company engaged in such relationships.
Investments
Information regarding the Company’s investment portfolio, which is comprised primarily of investment grade, fixed maturity securities, is presented in Item 1, Note 3 of the Consolidated Financial Statements and Item 2, Investments Results.
Cash Flow
The short-term liquidity requirements of the Company, within a 12 month operating cycle, are for the timely payment of claims and benefits to policyholders, operating expenses, interest payments and federal income taxes. Cash flow generated from operations has been, and is expected to be, adequate to meet the Company's operating cash needs in the next 12 months. Cash flow in excess of operational needs has been used to fund business growth, pay dividends to shareholders and repurchase shares of HMEC's common stock. Long-term liquidity requirements, beyond one year, are principally for the payment of future insurance and annuity policy claims and benefits, as well as retirement of long-term debt. The following table summarizes the Company's consolidated cash flows activity for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Six Months Ended
June 30,
|
|
2019-2018
|
|
|
2019
|
|
2018
|
|
Change %
|
Net cash provided by operating activities
|
|
$
|
97.8
|
|
|
$
|
151.3
|
|
|
-35.4
|
%
|
Net cash provided by (used in) investing activities
|
|
23.2
|
|
|
(112.4
|
)
|
|
120.6
|
%
|
Net cash used in financing activities
|
|
(125.3
|
)
|
|
(38.3
|
)
|
|
N.M.
|
Net increase (decrease) in cash
|
|
(4.3
|
)
|
|
0.6
|
|
|
N.M.
|
Cash at beginning of period
|
|
11.9
|
|
|
7.6
|
|
|
56.6
|
%
|
Cash at end of period
|
|
$
|
7.6
|
|
|
$
|
8.2
|
|
|
-7.3
|
%
|
___________________
N.M. - Not meaningful.
Operating Activities
As a holding company, HMEC conducts its principal operations in the personal lines segment of the property and casualty and life insurance industries through its subsidiaries. HMEC's insurance subsidiaries generate cash flow from premium and investment income, generally well in excess of their immediate needs for policy obligations, operating expenses and other cash requirements. Cash provided by operating activities primarily reflects net cash generated by the insurance subsidiaries.
For the
six
months ended
June 30, 2019
, net cash provided by operating activities decreased $53.5 million compared to the same period in 2018, primarily due to a decrease in Investment income collected and an increase in Policy acquisition and other operating expenses paid.
Investing Activities
HMEC's insurance subsidiaries maintain significant investments in fixed maturity securities to meet future contractual obligations to policyholders. In conjunction with its management of liquidity and other asset/liability management objectives, the Company, from time to time, will sell fixed maturity securities prior to maturity, and reinvest the proceeds into other investments with different interest rates, maturities or credit characteristics. Accordingly, the Company has classified the entire fixed maturity securities portfolio as available for sale.
During the first quarter of 2019, HMEC acquired BCG.
Financing Activities
Financing activities include primarily payment of dividends, receipt and withdrawal of funds by annuity contractholders, changes in deposit asset on reinsurance, net, issuances and repurchases of HMEC's common stock, fluctuations in book overdraft balances, and borrowings, repayments and repurchases related to debt facilities.
Horace Mann Life Insurance Company (HMLIC), one of the Company's subsidiaries, operates under funding agreements with FHLB. In January 2019, HMLIC received an additional $50.0 million from FHLB under a funding agreement and receipt of those funds has been reported in Annuity Contracts: Variable, Fixed and FHLB Funding Agreements, Deposits. Advances to HMLIC from FHLB under funding agreements totaled $675.0 million as of June 30, 2019. For the
six
month period ended
June 30, 2019
, cash inflows from annuity contract deposits, excluding the FHLB transaction, increased $17.2 million, or 8.7%, compared to the prior year period. Cash outflows from annuity contract benefits, withdrawals and net transfers to Separate Account (variable annuity) assets decreased $4.5 million, or 2.0%, compared to the prior year period.
Financing activities for the six month period ended June 30, 2019 also includes a one time cash payment of $124.1 million as part of the initial transfer under the annuity reinsurance transaction.
Capital Resources
The Company has determined the amount of capital which is needed to adequately fund and support business growth, primarily based on risk-based capital formulas including those developed by the National Association of Insurance Commissioners (NAIC). Historically, the Company’s insurance subsidiaries have generated capital in excess of such needed capital. These excess amounts have been paid to HMEC through dividends. HMEC has then utilized these dividends and its access to the capital markets to service and retire long-term debt, pay dividends to its shareholders, fund growth initiatives, repurchase shares of its common stock and for other corporate purposes. If necessary, HMEC also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as issuances of various securities. The insurance subsidiaries are subject to various regulatory restrictions which limit the amount of annual dividends or other distributions, including loans or cash advances, available to HMEC without prior approval of the insurance regulatory authorities. The aggregate amount of dividends that may be paid in
2019
from all of HMEC's insurance subsidiaries without prior regulatory approval is $90.7 million, of which $54.8 was paid during the
six
month period ended
June 30, 2019
. Management anticipates that the Company’s sources of capital will continue to generate sufficient capital to meet the needs for business growth, debt interest payments, shareholder dividends and its share repurchase program. Additional information is contained in Item 8, Note 10 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
The total capital of the Company was
$1,797.6 million
at
June 30, 2019
, including
$297.9 million
of long-term debt. Total debt represented 18.7% of total capital excluding net unrealized investment gains on fixed maturity securities (
16.6%
including net unrealized investment gains on fixed maturity securities) at
June 30, 2019
, which was below the Company’s long-term target of 25%.
Shareholders’ equity was
$1,499.7 million
at
June 30, 2019
, including net unrealized investment gains on fixed maturity securities in the Company’s investment portfolio of $203.1 million after taxes and the related impact of DAC associated with investment contracts and life insurance products with account values. The market value of the Company’s common stock and the market value per share were $1,659.4 million and $40.29, respectively, at
June 30, 2019
. Book value per share was
$36.41
at
June 30, 2019
(
$31.48
excluding net unrealized investment gains on fixed maturity securities).
Additional information regarding net unrealized investment gains on fixed maturity securities in the Company’s investment portfolio at
June 30, 2019
is included in Item 1, Note 3 of the Consolidated Financial Statements and in Item 2, Results of Operations by Segment in this report.
Total shareholder dividends paid were $23.6 million for the
six
month period ended
June 30, 2019
. In March and May
2019
, the Board of Directors approved regular quarterly dividends to
$0.2875
per share.
For the
six
month period ended
June 30, 2019
, the Company did not repurchase any shares of its common stock under its share repurchase program, which is further described in Item 8, Note 9 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
. As of
June 30, 2019
, $22.8 million remained authorized for future share repurchases under the repurchase program.
The following table summarizes the Company's debt obligations.
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
June 30, 2019
|
|
December 31, 2018
|
Short-term debt:
|
|
|
|
|
Bank Credit Facility, expires June 21, 2024
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
Long-term debt:
|
|
|
|
|
4.50% Senior Notes, due December 1, 2025. Aggregate principal
amount of $250 million less unaccrued discount of $0.4 million
and $0.5 million (4.5% imputed rate) and unamortized debt
issuance costs of $1.7 million and $1.8 million
|
|
247.9
|
|
|
247.7
|
|
FHLB borrowing
|
|
50.0
|
|
|
50.0
|
|
Total
|
|
$
|
297.9
|
|
|
$
|
297.7
|
|
As of
June 30, 2019
, the Company had outstanding
$250.0 million
aggregate principal amount of 4.50% Senior Notes (Senior Notes due 2025), which will mature on December 1, 2025, issued at a discount resulting in an effective yield of 4.53%. Interest on the Senior Notes due 2025 is payable semi-annually at a rate of 4.50%. Detailed information regarding the redemption terms of the Senior Notes due 2025 is contained in the Item 8, Note 7 of the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
. The Senior Notes due 2025 are traded in the open market (HMN 4.50).
As of
June 30, 2019
, the Company had $50.0 million outstanding with FHLB. For FHLB borrowings, the Board has authorized a maximum amount equal to the greater of 10% of admitted assets or 20% of surplus of the consolidated property and casualty companies. For the total $50.0 million received, $25.0 million matures on October 5, 2022 and $25.0 million matures on December 2, 2022. Interest on the borrowings accrues at an annual weighted average rate of 2.7230% as of
June 30, 2019
. HMIC's FHLB borrowings of $50.0 million are included in Long-term debt on the Consolidated Balance Sheet.
On June 21, 2019, the Company, as borrower, replaced its current line of credit with a new five-year Credit Agreement (Bank Credit Facility). The credit agreement extends the commitment termination date to June 21, 2024 from the previous termination date of June 27, 2023. The new Bank Credit Facility increased the amount available on this senior revolving credit facility to $225.0 million from $150.0 million. PNC Capital Markets, LLC and JPMorgan Chase Bank, N.A. served as joint leads on the new agreement, with The Northern Trust Company, U.S. Bank National Association, KeyBank National Association, Comerica Bank and Illinois National Bank participating in the syndicate. Terms and conditions of the new Bank Credit Facility are substantially consistent with the prior agreement, with an interest rate based on LIBOR plus 115 basis points. The Company utilized the senior revolving credit facility to partially fund the acquisition of NTA. Moving forward, the Company will use the senior revolving credit facility for ongoing working capital, capital expenditures and general corporate expenditures.
The unused portion of the Bank Credit Facility is subject to a variable commitment fee, which was 0.15% on an annual basis at
June 30, 2019
.
As described in Note 2, on July 1, 2019, the Company completed its acquisition of NTA utilizing the senior revolving credit facility to fund a portion of the purchase price. As of August 1, 2019, the Company had $135 million outstanding under the senior revolving credit facility.
To provide additional capital management flexibility, the Company filed a "universal shelf" registration statement on Form S-3 with the Securities and Exchange Commission (SEC) on March 13, 2018. The registration statement, which registered the offer and sale by the Company from time to time of an indeterminate amount of various securities, which may include debt securities, common stock, preferred
stock, depositary shares, warrants, delayed delivery contracts and/or units that include any of these securities, was automatically effective on March 13, 2018. Unless withdrawn by the Company earlier, this registration statement will remain effective through March 13, 2021. No securities associated with the registration statement have been issued as of the date of this Quarterly Report on Form 10-Q.
On March 13, 2018, the Company filed a "shelf" registration statement on Form S-4 with the SEC which became effective on May 2, 2018. Under this registration statement, the Company may from time to time offer and issue up to 5,000,000 shares of its common stock in connection with future acquisitions of other businesses, assets or securities. Unless withdrawn by the Company, this registration statement will remain effective indefinitely. No securities associated with the registration statement have been issued as of the date of this Quarterly Report on Form 10-Q.
Financial Ratings
HMEC’s principal insurance subsidiaries are rated by S&P, Moody’s, A.M. Best Company, Inc. (A.M. Best) and Fitch. These rating agencies have also assigned ratings to the Company’s long-term debt securities. The ratings that are assigned by these agencies, which are subject to change, can impact, among other things, the Company’s access to sources of capital, cost of capital, and competitive position. These ratings are not a recommendation to buy or hold any of the Company’s securities.
Assigned ratings were reviewed by all of the rating agencies in June and July 2019 in conjunction with the announcement of the Company’s financing plans to purchase NTA. A.M. Best and S&P affirmed the ratings that were in place at December 31, 2018. Moody’s and Fitch affirmed their ratings with a stable outlook, removing negative watches from their respective debt and insurance financial strength ratings placed after the announcement of NTA acquisition in December 2018. Assigned ratings as of
July 31, 2019
were as follows (the insurance financial strength ratings for the Company’s Property and Casualty insurance subsidiaries and the Company’s principal Life insurance subsidiary are the same):
|
|
|
|
|
|
|
|
|
|
|
|
Insurance Financial
|
|
|
|
|
Strength Ratings (Outlook)
|
|
Debt Ratings (Outlook)
|
As of July 31, 2019
|
|
|
|
|
S&P
|
|
A
|
|
(stable)
|
|
BBB
|
|
(stable)
|
Moody’s
|
|
A2
|
|
(stable)
|
|
Baa2
|
|
(stable)
|
A.M. Best
|
|
A
|
|
(stable)
|
|
bbb
|
|
(stable)
|
Fitch
|
|
A
|
|
(stable)
|
|
BBB
|
|
(stable)
|
Reinsurance Programs
Information regarding the reinsurance program for the Company’s Property and Casualty segment is located in Item 1, Reporting Segments of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
Information regarding the reinsurance program for the Company’s Life segment is located in Item 1, Reporting Segments of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2018
.
Effective April 1, 2019, the Company reinsured a $2.9 billion block of policy liabilities related to legacy individual annuities written in 2002 and prior to AA- S&P rated RGA Reinsurance Company, a subsidiary of Reinsurance Group of America, Incorporated (RGA). The block includes $2.2 billion of fixed annuities reinsured under coinsurance and $0.7 billion of variable annuities reinsured under modified
coinsurance. RGA’s financial obligations for the general account liabilities of the reinsured annuity contracts are secured by its assets placed in a comfort trust for HMLIC’s sole use and benefit. Upon RGA’s material breach of the reinsurance agreement, deterioration of its RBC ratio to a certain level, or certain other events, HMLIC may recapture the reinsured business.